DMPQ- . Discuss the recommendations given by Urjit patel committee for monetary policy framework.

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. The main objective of the committee was 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 with a focus on inflation management. The group submitted its report in January, 2014 and inter-alia, made the following recommendations with regard to managing inflation in  the country:

  • CPI (combined) should be used as the nominal anchor for a flexible inflation targeting (FIT) framework (instead of current WPI based framework). The choice of CPI as nominal  anchor was mainly on account of the fact that the CPI closely reflects cost of living and  has larger influences on inflationary expectations than other anchors.
  • The monetary policy decision-making should be vested with a monetary policy committee, chaired by the RBI Governor with rate action decided by votes, the model  followed by the US Federal Reserve. (But recently government has decided that  government will set up inflation targets for RBI and not a committee of RBI as the report  suggests) (The FSLRC had also suggested setting up a five member monetary policy  committee headed by the governor) (Having a committee system in place would mark a  radical shift in the way monetary policy is decided in the country. Currently, the governor is the sole authority to decide policy and the RBI board only has an advisory role.  Following the change, policy will be decided by the proposed committee chaired by the  governor through a vote).
  • Target rate of inflation should be 4 per cent with a tolerance band of 2 per cent to be achieved in a two-year time frame.
  • Administered prices and interest rates should be eliminated as they act as impediments to monetary policy transmission and achievement of price stability.
  • The transition path to the target zone should be graduated to bring down inflation from the current level of around 10 per cent to 8 per cent over a period not exceeding 12  months and to 6 per cent over a period not exceeding the next 24 months.

 

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