In 2016, the Reserve Bank of India Act, 1934 was amended to provide a statutory basis for the implementation of the FIT framework in India.
- The FIT framework was recommended by an Expert Committee headed by Dr. Urjit Patel.
About FIT Framework
- As per Section 45ZA of the RBI Act, 1934, Central Government shall, in consultation with the Bank, determine the inflation target in terms of the Consumer Price Index (CPI), once in every five years.
- Target: Central Government then notified the inflation target of 4% with upper tolerance band of 6% and lower tolerance band of 2% for the period 2016-2021.
- This target was retained for 2021-2026 and now has been retained for 2026-2031 as well.
- Target Achievement: RBI Act provides for a Monetary Policy Committee (MPC) to determine the policy rate required to achieve the inflation target.
- Composition: It is a six-member body comprising:
- RBI Governor (ex-officio Chairperson)
- RBI Deputy Governor (in charge of monetary policy)
- One RBI officer nominated by the Central Board
- Three external members appointed by the central government with expertise in economics, banking and finance, or monetary policy
- Policy Failure: Inflation outside the tolerance band for three consecutive quarters is considered a failure of the monetary policy framework.
