Finance Ministry's decision on Monetary Policy
by kunal gajbhiye
1. why in news
1.1. the Finance Ministry announced that the inflation target for the five years between April 2021 and March 2026 will remain unchanged at 4%,
1.1.1. with an upper tolerance level of 6% and a lower tolerance level of 2%
1.1.2. Affect
1.1.2.1. This is the retail inflation target that will drive the country’s monetary policy framework and influence its decision to raise, hold or lower interest rates.
2. Why this is important
2.1. India changed its focus of monetary policy formulation from Money supply based to
2.1.1. controlling Money supply growth to
2.1.1.1. inflation based targgeting
2.1.1.1.1. Followed mostly by developed countries
3. Implication from RBI's perspective
3.1. Will be able to control and target inflation over the medium term than monthly levels
3.1.1. through its policies
4. Present Inflation levels high in India
4.1. reasons
4.1.1. high food prices
4.1.2. High fuel prices
5. What if the Government had eased up the Inflation target to revive growth
5.1. RBI would have further reduced the intrest rates which would have increased inflation
5.1.1. Questions arise over RBI's credibility
5.2. RBI Would not have taken steps to arrest inflation
5.2.1. for ex-
5.2.1.1. RBI in recent past have been urging Central and State govts to reduce taxes on fuels which has led to hike in petrol and diesel prices