Recommendations of the Committee aim to radically transform RBI's monetary policy framework and address impediments to policy transmission-ASSOCHAM

The much awaited Urijit Patel Committee report, constituted to propose changes to the conduct of monetary policy framework in India, was released yesterday. The recommendations of the Committee aim to radically transform RBI's monetary policy framework and address impediments to policy transmission - a step in the right direction.

The Committee suggests:

RBI to adopt headline CPI as the measure of nominal anchor for monetary policy communication

Defining 4% with a band of +/- 2% as the acceptable band of CPI inflation, which the RBI will gradually move towards over the period of next 24 months

Creation of a Monetary Policy Committee (MPC) to determine policy outcomes by majority voting. Additionally, MPC to be accountable for failure to achieve the nominal anchor

 

Shift towards 14-day term repo rate as the operating target in a phased manner

Introduction of new instruments (standing deposit facility, longer term repos etc.) for better management of systemic liquidity and ensure its consistency with policy stance

Basis the Committee report, ASSOCHAM believes that 3 key underlying themes will define the conduct of monetary policy making in India going forward:

(i) Single Indicator approach (versus the current Multiple Indicator approach) to impart clarity and transparency to RBI's objective.

(ii) Rule based policy (versus the current discretionary approach) to facilitate the pre-emption RBI's reaction function.

(iii) Greater harmonization between Government and RBI accompanied by gradual elimination of 'fiscal dominance of monetary policy'.

Clearly, in the long run, this will pave way for a more sustainable growth in the Indian economy, as inflation is an inequitable tax and anchoring it at low levels is critical.

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