Policy changes

Many of the recommendations made by  an expert committee on monetary policy framework, appointed by the Reserve Bank and headed by its Deputy Governor Urjit Patel, are useful and are aimed at  effectively addressing some of the issues faced by both the apex bank and the government.

Inflation management, macro-economic stability, the usefulness of monetary policy as a tool and the relative roles of the Reserve Bank and the government in dealing with these issues have all been debated widely, especially since 2007. The economic situation has deteriorated globally and domestically since then, inflation has been ruling strong and policy measures have not had much impact. The committee has accepted suggestions made by some earlier committees and its main proposals would help to create framework which conforms to best international practices.

One important recommendation is that the consumer price index, which is the relevant indicator of the price situation for the common people, should be the benchmark for monetary policy. The current policy framework has many objectives  and is sometimes considered ambiguous. A clear policy aim, to be achieved over time, of containing consumer price inflation within a band of four per cent is not unrealistic. The committee wants a transition period of two years for this. Monetary policy should be adequately supported by liquidity management and the committee envisages a change in decision-making structure in the RBI.

The committee wants monetary policy decisions to be made by a committee headed by the RBI governor and including senior internal members of the apex bank and two experts from outside. It is expected that this structure will create better transparency and accountability in the decision-making process. The monetary policy committee will be accountable for any failure to achieve the inflation target.  The effect of all the suggestions may even be making the Reserve Bank a more modern central bank which responds more effectively to demands and situations. The proposed new policy framework is intended to make decisions more objective and to reduce the role of discretion in them. This is welcome. Banks and financial markets are happy with the proposals though the finance ministry may not be so. That may be so because the report envisages a more important role for the RBI in  policy management.