The government and the Reserve Bank of India have signed an agreement on Monetary Policy Framework whereby the government has set a target for RBI to bring down inflation below six per cent by January 2016. The Agreement, which was signed on February 20 but made public yesterday, veers round to RBI Governor Raghuram Rajan’s view that India too should move towards inflation targeting, which is common in developed economies.

Currently, the Centre and the RBI give inflation estimates, but don’t set targets. As per the agreement, If the RBI fails to meet the target, it will have to report to the government the reasons for the failure to achieve the target, what remedial action it proposes to take and estimate of the time period within which the target would be achieved.

The agreement will put in place a framework of a modern monetary policy to meet the challenges of an increasingly complex economy. According to the agreement, this framework will be monitored by the RBI. The Agreement, in line with the recommendations of the RBI’s Urjit Patel committee, will smoothen the monetary policy scene.

It will provide a predictable policy stance on inflation, helping investors, especially in the debt market. The Agreement also binds the Centre to taking proactive measures for price control. The country has suffered the vagaries of price volatility because of, one, its big reliance on imports for fuel and, two, the farm sector’s dependence on the monsoon.

Finance minister Arun Jaitley had in his budget speech said that the government would amend the RBI Act to provide for a Monetary Policy Committee and have a memorandum of understanding with the Reserve Bank.