Of Inflation targeting....

The finance ministry and the Reserve Bank of India (RBI) have agreed on sweeping changes in deciding interest rates with the central bank governor being handed out the exclusive mandate to decide on the issue to meet the government-fixed inflation targets.
To begin with, an agreement between the RBI and the ministry has pegged the inflation target at under 6% by January 2016, with the goal for 2016-17 onwards set at 4%. Inflation has to stay within the 2-6% band from 2016-17 and any deviation for three consecutive quarters will have to be explained by the RBI as it would be treated as a “failure“ by the central bank to target inflation.
In case of a failure, RBI will have to specify the reasons, suggest remedial actions and estimate the time period within which the target will be achieved once the corrective steps are implemented. RBI has joined the group of central banks like the US Federal Reserve and European Central Bank, which have inflation targeting as their main objective. However, at the insistence of the finance ministry , the agreement also said the objective “is to primarily maintain price stability, while keeping in mind the objective of growth“.
Although RBI governor Raghuram Rajan had proposed that Parliament should mandate an inflation target, former governor Y V Reddy was staunchly against the central bank having inflation targeting as a single objective. His argument was that the two main components of inflation -fuel and food -were driven more by supply-side factors.Fuel costs depend on international prices and food prices are often linked to vagaries of the monsoon.
Finance secretary Rajiv Mehrishi, who has signed the agreement with Rajan, however, clarified that factors such as drought or floods, which have a bearing on prices, will be factored in.
The agreement targets inflation (RBI now uses retail inflation as the barometer) and gives the central bank a free hand in determining the policy rate -which according to the agreement is the repo rate. Finance minister Arun Jaitley said the RBI Act will be amended later this year to set up a monetary policy committee (MPC), which will decide on rates.
Multinational and private banks will have to stretch their rural reach and lend to small farmers and micro enterprises to meet the new priority sector norms proposed by Reserve Bank of India. The new norms also give a boost to medium enterprises, renewable energy , healthcare and sanitation which, are included in priority sector under the proposed norms.
The positive news for private and foreign banks is that the RBI proposes to implement the norms in a phased manner, which means the banks will have two to three years to develop a strategy to lend to this segment. A panel headed by RBI chief general manager Lily Vadera, which has recommended this norms, has also introduced some innovations such as the priority sector lending certificates, which will enable banks meet their targets even when they stick to their core competency . The panel has recommended that the agri lending target be retained at 18% of net bank credit. But it has also recommended a sub-target of 8% of net bank credit for small and marginal farmers to be achieved in a phased manner.At the same time, more flexibility has been recommended for banks to lend the remaining 10%. Those who do not meet the norms will be subject to the same penal provisions that are applicable now, which include subscribing to government sponsored funds where the rate of return is much lower than the cost of funds for banks.
“The Indian economy has changed since priority sector lending guidelines were conceived. There is a need to reorient guidelines towards today's growth and inclusion agenda,“ RBI said in a statement.
While the norms now extends lending to medium-scale industries in addition to small scale, it has included a sub-limit of 7.5% for lending to microenterprises, which is to be achieved in a phased manner.
On education loans, the committee has recommended a limit of Rs.10 lakh for domestic as well as overseas studies.At present, the limit is Rs.10 lakh for domestic and Rs.20 lakh for overseas.