The Union Government has set an inflation target of four per cent for the next five years i.e. till March 31, 2021.
In this regard, Union Government will soon set-up Monetary Policy Committee (MPC) to adhere to the target till March 31, 2021.
Background
This target was fixed after the Union Government and Reserve Bank of India (RBI) had reached an agreement on a monetary policy framework.
The framework had had set the inflation target at four per cent, plus or minus two per cent. However, there was no legal backing to it.
The Union Government in June 2016 also had notified rules for setting up the MPC giving effect to amendments in the RBI Act.
What is Inflation Targeting?
Inflation Targeting is a monetary policy in which a central bank estimates and makes public a projected or “target” inflation rate.
After declaration of target, the central bank attempts to steer actual inflation towards the target through the use of interest rate changes and other monetary tools.
The key advantage of a target is that it allows to recognise the short run trade-offs between inflation and growth.
It also enables Central Bank to pursue the inflation target in the long run over the course of a business cycle.
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