3. Flexible Inflation Targeting framework
● In May 2016, New Monetary Policy Framework/ Flexible Inflation Targeting
(FIT) framework introduced (Urjit Patel Committee recommendations)
Earlier Framework FIT Framework
Indicator Multiple Indicators- Inflation,
Growth, Exchange rate,
Current Account Balance etc.
No clarity about the primary
objective-------unpredictability
for market participants
Inflation (CPI) Targeting/
Price Stability
Decision Making Governor Monetary Policy Committee
Accountability No Failure is defined as the
inability to achieve the
inflation target for three
successive quarters
4. Flexible Inflation targeting framework
● In May 2016, the Reserve Bank of India (RBI) Act, 1934 was amended to
provide a statutory basis for the implementation of the flexible inflation
targeting framework.
● As per amended Act, Government of India (GoI) to set inflation target once in
5 years. Current CPI target: Kept unchanged at 4% ± 2% (April 1, 2021 to
March 31, 2026)
● Failure: Breach of tolerance levels for 3 consecutive quarters
● Monetary Policy Committee (MPC) constituted, comprising 3 members from
RBI and 3 members to be appointed by GoI (for a term of 4 years), to
determine policy rate to achieve the inflation target
● The MPC is required to meet at least four times in a year
● Each member of the MPC has one vote, and in the event of an equality of
votes, the Governor has a second or casting vote
5. Flexible Inflation Targeting Framework Evolution
worldwide
Year Country
1989New Zealand
1991Canada
1992United Kingdom
1993Australia
1995Sweden
1996Mauritius
1997Israel, Czech Republic
1998Poland, South Korea
1999Brazil, Chile, Colombia
2006Armenia, Turkey
2007Ghana
2008Botswana
2009Serbia, Albania, Georgia
2010Moldova
2011Uganda
2012USA
2013Japan
2014Russia
2015India
2015Ukraine
2016Argentina
CENTRAL BANK Target (2022)
UK 2.00%
US 2.00%
European Central Bank 2.00%
Bank of Japan 2.00%
Reserve Bank of India 4.00% +/-2.0%
Reserve Bank of Australia 2.00% - 3.00%
Res. Bank of New Zealand 2.00% +/-1.0%
Bank of Canada 2.00% +/-1.0%
Norges Bank 2.00%
Swiss National Bank <2.00%
Central Bank of Brazil 3.75% +/-1.5%
People's Bank of China around 3.00%
As of now, 36 countries, including India, have officially
adopted IT. In addition, all 19 countries in the euro zone
are bound by the inflation target chosen by the European
Central Bank. This takes the total count of IT countries
to 55.
6. Instruments of Monetary Policy
- Open Market Operations (OMO)
- Market Stabilization Scheme (MSS)
- GSAP, Operation Twist, Variable Repo/ Reverse Repo, LTRO, TLTRO
- Operating target of monetary policy- weighted average call rate
- Monetary Policy Transmission: External Benchmarking
Standing Deposit Facility (SDF)
- Introduced in April 2022. An additional tool for absorbing liquidity without any
collateral
- Urjit Patel Monetary Policy Committee report in 2014.
- In 2018, the amended Section 17 of the RBI Act empowered the Reserve Bank
to introduce SDF. Accordingly, RBI introduced it in April 2022.
- The SDF is a liquidity window through which the RBI will give banks an option
to park excess liquidity with it.
Helps in liquidity adjustment as well as OMO
7. Monetary Policy Tools – Other Central Banks
Policy Rate- Short Term Interest Rate
Unconventional Tools
● Negative Interest Rate Eg: Switzerland, Japan
● Asset Purchase Program (OMO/ QE). For the first time, US Fed announced in March
2020 that it would begin buying corporate debt to unfreeze the bond market amid covid
(plans to sell off). BoE- non-financial investment grade corporate bonds, BoJ- CPs and
corporate bonds
● Long-term funding facilities. Following the GFC and recently after the pandemic, central
banks provided low-cost LT funding to FIs at concessional rates to pass on the benefits
to businesses and households.
● Forward guidance
RBI- Repo Rate BoJ- Short term interest rate
Fed- Discount Rate and Federal Funds Rate ECB- Main Refinancing Operations Fixed Rate
and Standing Deposit Facility
BoE- Bank Rate
8. Recent Rate Hikes
Governor’s Unscheduled Press Briefing on May 04, 2022: Policy repo rate
hiked by 40 bps to 4.40%, first rate move in two years and first hike in nearly four
years. Also, CRR increased by 50bps to 4.50%. In April 2022, Stance changed to
“Remain accommodative while focusing on withdrawal of accommodation”
Monetary Policy Statement- June 06-08, 2022: Policy rate increased by 50 bps
to 4.90%. Consequently, SDF stands adjusted to % and the MSF and the Bank
Rate to 5.15%. CRR kept unchanged.
● Decided to remain focused on withdrawal of accommodation
10. Key Policy Considerations
● Multi-decadal high inflation and slowing growth, persisting geopolitical tensions and
sanctions, elevated prices of crude oil and other commodities and lingering COVID-19
related supply chain bottlenecks
● CPI headline inflation rose further from 7.0% in March 2022 to 7.8% in April 2022 -
broad based (around 78% of the CPI basket recorded a rise in inflation in April).
● Inflation is now projected at 6.7% in 2022-23, with Q1 at 7.5%; Q2 at 7.4%; Q3 at 6.2%;
and Q4 at 5.8%. inflation is likely to remain above the upper tolerance level of 6%
through the first three quarters of 2022-23.
● Globalization is finished. Near shoring, on shoring and reshoring. Relocation of supply
chains to friendly countries
● Recession- Google searches. Narrative changing
