Macroeconomic Stability is a core economic concept that describes a national economy's state of minimized vulnerability to internal and external shocks, which is a necessary condition for sustained economic growth. It is measured by key variables such as low and stable inflation, low national debt relative to GDP, low fiscal deficits, and currency stability.
The pursuit of stability gained prominence in India following the comprehensive economic liberalization of 1991, which was necessitated by a severe balance of payments crisis. To institutionalize this stability, India relies on two main pillars: fiscal and monetary policy frameworks.
The fiscal pillar is the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, which was enacted to address rising fiscal deficits in the 1990s. The Act provides a legal framework for fiscal consolidation, mandating a phased reduction in the fiscal deficit (initially targeting 3% of GDP) and prohibiting the Central Government from borrowing directly from the Reserve Bank of India (RBI) after 2006 to prevent the monetization of deficits.
The monetary pillar was significantly reformed with the signing of the Monetary Policy Framework Agreement (MPFA) between the Government of India and the RBI in February 2015. This agreement, given statutory backing by an amendment to the RBI Act, 1934 in May 2016, established a Flexible Inflation Targeting (FIT) regime. The primary mechanism is the Monetary Policy Committee (MPC), constituted under Section 45ZB of the amended RBI Act, 1934, which sets the policy interest rate to maintain the Consumer Price Index (CPI) inflation target at 4% with a tolerance band of +/- 2%. This move to the MPC in 2016 replaced the earlier practice where the RBI Governor alone decided the policy rates.