In a bid to bring down prices, the RBI has in an agreement with government committed to using monetary tools to cut inflation to pre-decided levels.
The Monetary Policy Framework Agreement binds Reserve Bank of India (RBI) to using monetary policy tools including fixation of interest rates, to bring down inflation to less than 6 per cent by January 2016 and to around 4 per cent by March next year.
"Decisions on whether to cut (interest rate) or not should be taken based on inflationary pressures and forecast going forward ... A good central bank will take its decision based on data and outlook," Chief Economic Advisor Arvind Subramanian told reporters here.
Signed on February 20, the objective of monetary policy will be to "primarily maintain price stability while keeping in mind the objective of growth".
"The Reserve Bank will aim to bring inflation below 6 per cent by January 2016. The target of financial year 2016-17 and all subsequent years shall be four per cent with a band of (+/-) 2 per cent," the agreement said.
While the agreement gives a free hand to the RBI Governor to decide on the monetary policy measures to achieve the inflation target, it also requires the RBI to give out to the Central Government a report in case the target is missed for a period of time.
To give effect to the agreement, the government will amend the RBI Act some time in the next fiscal.
The RBI will have to give a report to the government giving reasons for failure of meeting the target if CPI inflation is more than 6 per cent or less than 2 per cent for three consecutive quarters.
Asked whether it is the sole responsibility of the RBI to control inflation, Finance Secretary Rajiv Mehrishi said: "It is not a pass or fail test. It is just that you have to explain why you have been unable to do it".
The Consumer Price Index-based inflation rose to a 5.11 per cent in January, from 4.28 per cent in December.
