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Kerala PSC Indian Economy Book Study Materials Page 173Book's First Page
n lation and siness le 7.9 their monetary policy to realise the objective of a (a) More than 6 per cent for three stable rate of inflation36 (the Government of India consecutive quarters for the financial asked the RBI to perform this function in the early year 2015–16 and all subsequent 1970s). years. India commenced inflation targeting (b) Less than 2 per cent for three ‘formally’ in February 2015 when an agreement consecutive quarters in 2016–17 and between the GoI and the RBI was signed related all subsequent years. to it—the Agreement on Monetary Policy 5. If the RBI fails to meet the target it shall Framework. The agreement provides the aim of set out in a report to the GoI: inflation targeting in this way—’it is essential to (a) the reasons for its failure to achieve have a modern monetary framework to meet the the target under set in this agreement; challenge of an increasingly complex economy. (b) remedial actions proposed to be taken Whereas the objective of monetary policy is to by the RBI; and primarily maintain price stability, while keeping in (c) an estimate of the time-period within mind the objective of growth.’ The highlights of which the target would be achieved the agreement is as given below: pursuant to timely implementation of 1. The RBI will aim to bring CPI-C Inflation proposed remedial actions. below 6 per cent by January 2016. The 6. Any dispute regarding the interpretation target for financial year 2016–17 and all or implementation of the agreement to be subsequent years shall be 4 per cent with resolved between the Governor, RBI and a band of +/- 2 per cent (it means the the GoI. ‘healthy range of inflation’ to be 2–6 per It should be noted that the Urjit Patel cent). Committee set by the RBI on monetary policy 2. RBI to publish the Operating Target(s) gave similar advices by early 2014—the move is and establish an Operating Procedure of seen as a follow up to this. This way India joined monetary policy to achieve the target. the club of inflation targeting countries such as Any change in the operating target(s) USA, UK, European Union, Japan, South Korea, and operating procedure in response to China, Indonesia and Brazil. It was New Zealand evolving macro-financial conditions shall which went for inflation targeting in 1989 for the also be published. first time in the world.37 3. Every six months, the RBI to publish a document explaining: skeWflAtion (a) Source of inflation; Economists usually distinguish between inflation (b) Forecasts of inflation for the period and a relative price increase. ‘Inflation’ refers between six to eighteen months from to a sustained, across-the-board price increase, the date of the publication of the whereas ‘a relative price increase’ is a reference document; and 37. New Zealand passed a law to do this with a target of 0 to 2 per cent in ation with a provision that the overnor of the 4. The RBI shall be seen to have failed to eserve an of ew ealand could e fired if in ation meet the target if inflation is: crosses the 2 per cent upper limit—now this target range has been revised to 1 to 3 per cent (Stiglitz and Walsh, 36. Samuelson and Nordhaus, Economics, p. 723. Economics, p. 849).