Monetary Policy Framework Agreement (Mpfa)

The signing of the Monetary Policy Framework Agreement (MPFA) between the Indian government and the RBI on 20 February 2015 officially adopted flexible inflation targeting (ITF) in India. In May 2016, the Reserve Bank of India (RBI) Act of 1934 was amended to create a legal basis for the implementation of the FIT framework. The amended RBI Act of 1934 also provided that the central government, in agreement with the Bank, would set the inflation target for the consumer price index once every five years. I am happy to be back in my Alma Mater. Being here brings back a flood of memories. Today, I would like to address some aspects of the central bank in the Indian context and the role of the RBI in the current situation. I will focus specifically on the development of monetary policy regimes in India, and if I have to use Shakespeare`s poetic license, can I call it the seven ages of Indian monetary policy? Korhonen, L., Nuutilainen, R. (2017). Violation of monetary policy rules in Russia.

Russian Economics Review,3 (4), 366-378. In the case of large-scale asset purchases (also known as quantitative easing) by a central bank, long-term government bonds are purchased, financed by the credit of reserve accounts held by commercial banks to the central bank. This purchase would reduce government bond yields and serve as a signal that the key rate will remain at a lower level for a long period of time. For their part, sellers of government bonds can modify their asset portfolios and invest in riskier investments (. B, for example, corporate bonds), resulting in lower interest rates and higher asset prices, which stimulates economic growth. Central banks can also acquire private sector assets. In general, five types of nominal anchors were used: monetary aggregates, exchange rate, inflation rate, national income and price level. The Committee of Experts recommended that inflation be seen as the nominal anchor of the monetary policy framework in India, given that flexible inflation targets recognize the existence of a compromise on inflation in the short term and that stabilization and anchoring of inflation expectations are essential to ensure price stability on a sustainable basis. In addition, low and stable inflation is a necessary condition for high and sustainable growth, and inflation is also easy for the public to understand. The central government`s inflation target for the period from August 5, 2016 to March 31, 2021 was 4% for Consumer Price Index (CPI) inflation, with a higher tolerance threshold of 6% and a tolerance threshold of 2%. As shown in Figure 11, overall inflation generally remained within the tolerance range between August 2016 and March 2020, with the average inflation rate being slightly below 4% during this period. There have been episodes of high/unusual inflation due to supply shocks (food inflation, oil prices), but they have been properly integrated into policy decisions.