Finance Ministry inks pact with RBI to target CPI inflation at 4 per cent in FY17

The Reserve Bank of India (RBI) and the Ministry of Finance have agreed, in the biggest change to the monetary policy since opening up the domestic economy more than two decades ago, to introduce inflation targetting to rein in a long history of volatile price rises.

In a document dated February 20 but published on the ministry's website on Monday, the two sides set a consumer price or retail inflation target of 4 per cent, with a band of plus or minus 2 per centage points, by the financial year ending March 31, 2017.

The central bank will first aim to have consumer inflation fall below 6 per cent by January 2016.

The changes bring closer to reality a goal pursued relentlessly by RBI Governor Raghuram Rajan, who has said the inflation targeting, more commonly seen in developed economies, was also vital in the country.

RBI will be deemed to have missed its target if consumer inflation is at more than 6 per cent or at less than 2 per cent for three consecutive quarters starting in the 2015-16 financial year, the document also showed.

Finance Minister Arun Jaitley had said on Saturday the government and the RBI had agreed on a new monetary policy framework and promised to change the RBI Act, which is required to implement the changes.

The apex bank's governor will determine the country's key interest rates or any measures needed to achieve that inflation target. There was no mention in the document of a long-expected Monetary Policy Committee, though that is expected to be introduced at a later date.

Consumer prices rose an annual 5.11 per cent compared with a 4.28 per cent gain in December, according to data issued on February that changed the base year for measuring inflation to 2012 from 2010.

(Reuters)