The tone for inflation targeting was set by Finance Minister Arun Jaitley in his budget speech when he stressed on a modern monetary policy framework to meet challenges of an increasingly complex economy.
RBI Governor Raghuram Rajan was in agreement with Jaitley when he said that the central bank would develop the framework in consultation with the government during the year.
Retail inflation rose to 8.28 percent in May on account of rising food prices.
Through the new mechanism, the government and the Reserve Bank of India (RBI) may look to bring down consumer inflation to 8 percent by this year-end.
"It is also essential to have a modern monetary policy framework to meet the challenge of an increasingly complex economy. Government will, in close consultation with the RBI, put in place such a framework," Jaitley said.
Rajan, after the RBI's board meeting in Chennai said that the right answer to inflation is collaboration between RBI and the government.
"We will develop that monetary framework in discussion with the government over the course of the year," he said.
To revise and strengthen the monetary policy framework, RBI had appointed an expert committee headed by Deputy Governor Urjit R Patel in September, 2013.
The main objective of the committee is to recommend what needs to be done to revise and strengthen the current monetary policy framework with a view to making it transparent and predictable.
As per Patel committee recommendation, target rate of inflation should be 4 percent with a tolerance band of 2 percent to be achieved in a two-year time-frame.


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