JOIN US The Urjit Patel committee on monetary policy framework has submitted its report wherein it proposed the setting up of a monetary policy committee (MPC) to be headed by the Reserve Bank of India (RBI) governor and also be accountable for achieving the inflation target set by it.
Report of the Expert Committee, set up by RBI in September last year, to Revise and Strengthen the Monetary Policy Framework has recommended that retail inflation, measured by the Consumer Price Index (CPI), replace wholesale inflation as the price anchor.
The responsibility of the central bank, the panel suggested, should be to bring the retail inflation rate down at 4 per cent, with a variation of 200 bps on either side, in three years. “The nominal anchor should be defined in terms of headline CPI (-based) inflation, which closely reflects the cost of living and influences inflation expectations relative to other available metrics,” the report said.
If the MPC fails to achieve its target for three quarters in a row, it has to issue a public statement, mentioning reasons for failure and remedial measures, with signatures of all the five members.
Experts are of the view that if this practice was followed, the RBI would have valid reasons not to pay attention to any advisory from the government on its monetary policy stance. In recent times, finance ministers have repeatedly pressured the central bank to cut interest rates, even if the situation does not warrant such an action.
The lines between the government and RBI were set to be re-drawn if the recommendations of the committee were accepted, observers from the Mint Street said here.
Indicating a shift from a discretionary policy to a rule-based one, the panel has advocated adoption of a policy rate that is easily communicated and understood; it will be positive when inflation is above the nominal anchor.
Since bringing down inflation from the current level is essential to move to this proposed framework, the panel has also laid out a road map for this. It has suggested that the current level of retail inflation — at 10 per cent — be brought down to eight per cent within 12 months and then to six per cent over the next 24 months, before the recommended target of four per cent is formally accepted.
Commenting on the Report, Barclays Chief India Economist Siddhartha Sanyal said the committee had taken a very aggressive stance. “This could boost the credibility of RBI if, indeed, the targets are achieved. However, it will be a challenging task and will depend a lot on coordination with fiscal authorities,” he added.
It has also recommended that government should see it brings down its fiscal deficit below three per cent of gross domestic product (GDP) by 2016-17 and does away with administered prices, wages and interest rates.