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).