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RBI expert panel suggested adoption of new CPI for Anchoring Monetary Policy

Jan 22, 2014 12:44 IST

Expert Committee to revise and strengthen the monetary policy framework submitted its report to the Governor of RBI on 21 January 2013. The committee was headed by Dr. Urjit R Patel, the Deputy Governor of RBI and was constituted on 12 September 2013 by the Governor Dr. Raghuram G Rajan. It has been done to make it transparent and predictable.

The committee in its suggestion has recommended that a new Consumer Price Index (CPI) should be adopted by Reserve Bank of India (RBI) to anchor the monetary policy has been recommended on 21 January 2014 by an expert panel set by the central bank. The committee has also set an inflation target at 4 percent with a band of plus/minus 2 percent around it.

The panel in its recommendation has also suggested that the monetary policy decision should be vested in the hands of the Monetary Policy Committee (MPC) that will be headed by the Governor. These suggestions as recommendation is intended to better ground inflation expectations by making it clear that inflation is the RBI’s primary objective. It also expects to be held accountable for its performance in this regard.

As per the suggestions the government also needs to ensure the fiscal deficit as a ratio of GDP should be brought down to 3 percent by 2016-17 which should be consistent with the Fiscal Responsibility and Budget Management (Amendment) Rules 2013. In its suggestion it has suggested two schemes namely Market Stabilisation Scheme (MSS) and Cash Management Bills (CMBs) may be phased out and the government debt and cash management should be taken over by the Debt Management Office of the government. It has also suggested that all fixed income financial products should be treated on par with the bank deposits for the purposes of taxation and TDS.

The committee has suggested detachment of Open Market Operations (OMOs) from the fiscal operations and instead linked solely to the liquidity management. OMOs should not be used for managing yields on government on government securities.

About the Committee

Member of the committee apart from its chairman Dr. Urjit R Patel were: Dr. P.J. Nayak, Professor Chetan Ghate, Professor Peter J. Montiel, Dr. Sajjid Z. Chinoy, Dr. Rupa Nitsure, Dr. Gangadhar Darbha, Deepak Mohanty,
Dr. Michael Debabrata Patra was the Member Secretary of the panel.

The terms of reference of the Committee were
1. To review the objectives and conduct of monetary policy in a globalised and highly inter-connected environment.
2. To recommend an appropriate nominal anchor for the conduct of monetary policy.
3. To review the organisational structure, operating framework and instruments of monetary policy, particularly the multiple indicator approach and the liquidity management framework, with a view to ensuring compatibility with macroeconomic and financial stability, as well as market development.
4. To identify regulatory, fiscal and other impediments to monetary policy transmission, and recommend measures and institutional pre-conditions to improve transmission across financial market segments and to the broader economy.
5. To carefully consider the recommendations of previous Committees/Groups in respect of all of the above.

In recent years, inflation in India has been amongst the highest within the G-20. Household Inflation expectations have risen sharply and have remained at elevated levels, unhinged from the low inflation experience of 2000-07 as also from the global inflation record. Professional forecasters’ surveys show that the long-term inflation expectations have risen by about 150 basis points during this period.

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