The Reserve Bank of India favours retaining the inflation target and the tolerance band adopted in 2016, citing the long-term trend and global experience.
What Needs To Change
In the report, the RBI suggested changes in the inflation targeting framework to improve transparency, accountability and operational efficiency.
The failure of MPC to meet the inflation target should be defined as four quarters of overshooting or undershooting the target compared with the current definition of three quarters, according to the report.
The MPC may consider providing a more explicit forward guidance on the interest rate path at a future date as the projection process is strengthened further over time, the RBI said. Global practice suggests staggering tenures and exits of the MPC members, which would require an amendment to the RBI Act.
Shut period for MPC members—a communication blackout to avoid market volatility and weakening of transmission of policy signals—may be changed to seven days prior to the announcement and three days after, against the current seven days prior and after the policy.
According to the report, the three-day shut period after the announcement would help in clear and effective communication of the monetary policy decision by the RBI Governor.
The RBI also suggested that the transcripts of the MPC meetings maybe released in public domain after five to seven years. Currently, the central bank releases only the minutes of the meeting after 15 days of the policy announcement.
Among other changes suggested, the RBI said that a formal policy for MPC members may be designed to clarify the do’s and dont’s of communication. This would include written communication and broad guidance for other forms of communication.
To provide certainty to markets, the policy announcement can be at a time that is fixed (barring exceptional circumstances) and pre-announced, the RBI said.
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