Inflation Targeting

The announcement of an official target range for inflation is known as inflation targeting.
India commenced inflation targeting ‘formally’ in February 2015 when an agreement between the Government of India and the RBI was signed related to it—the Agreement on Monetary Policy Framework.
The agreement provides that it is essential to have a modern monetary framework to meet the challenge of an increasingly complex economy whereas the objective of monetary policy is to primarily maintain price stability while keeping in mind the objective of growth.’

Highlights of the agreement are:

RBI would aim to contain consumer price inflation within 4 percent with a band of (+/-) 2 percent.
The central bank would be seen as failing to meet the targets if retail inflation is more than 6 percent or less than 2% for three consecutive quarters.
If this happens, RBI will have to explain the reason for its failure to meet as well as give a time frame within which it will achieve it. RBI will publish the operating targets as well as operating procedure for the monetary policy through which the target for the monetary policy will be achieved.
The RBI will also be required to bring a document every six months to explain the sources of inflation and forecast for inflation for the next 6-18 months.
Any dispute regarding the interpretation or implementation of the agreement to be resolved between the Governor, RBI and the Government of India.
Monetary Policy Committee (MPC) is a statutory body established under the provisions of RBI Act, 1934.
Under Section 45ZA(1) of the RBI Act, 1934, the Central Government determines the inflation target in terms of the Consumer Price Index, once in every five years in consultation with the RBI. This target would be notified in the Official Gazette.
Monetary Policy Committee is defined in Section 2(iii)(CCI) of the Reserve Bank of India Act, 1934 and is constituted under Sub-section (1) of Section 45ZB of the same Act.