URJIT PATEL COMMITTEE

URJIT PATEL COMMITTEE 

An expert committee headed by Urjit R. Patel, Deputy Governor of the RBI was appointed in September 2013 to Revise and Strengthen the Monetary Policy Framework.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.

The panel submitted its report (January, 2014) made the following recommendations:

1. CPI (combined) should be used as the nominal anchor for a flexible inflation targeting (FIT) 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. 

2. 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. 

3. 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.

4. Administered prices and interest rates should be eliminated as they act as impediments to monetary policy transmission and achievement of price stability. 

5. The monetary policy decision-making should be vested with a monetary policy committee (MPC)— the RBI Governor as its Chairman and Deputy Governor as the Vice-Chairman, the Executive Director in charge of monetary policy could be its member and two external members. 

6. All fixed income financial products should be treated on a par with bank deposits for the purposes of taxation and TDS. With a sharp rise in the ratio of agricultural credit to agricultural GDP, the need for subventions on interest rate for lending to certain sectors would have to re-visited. 

7. In view of the cross-country and Indian experience with global spillovers driving episodes of large and volatile capital in flows as well as outflows, the committee felt that a flexible setting of monetary policy by the RBI in the short-run was warranted.This presages readiness to use range of instruments at its command. 

With regard to inflows that are excessive in relation to external financing requirements and the need for sterilised intervention, the RBI should build a sterilisation reserve out of its existing and evolving portfolio of Gol securities across the range of maturities, but accentuated towards a ‘strike capability’ to rapidly intervene at the short-end. The central bank should introduce a remunerated standing deposit facility, which would effectively empower it with unlimited sterilisation capability.As a buffer against outflows, the RBI’s strategy should be to build an adequate level of foreign exchange reserves.

8. The committee asked the Central Government to ensure that the fiscal deficit as a ratio to GDP (gross domestic product) is brought down to 3.0 per cent by 2016-17.

In view of the elevated level of current CPI inflation and hardened inflation expectations, supply constraints and weak output performance, the committee said the transition path to the target zone should be graduated to bringing down inflation from the current level of 10 per cent to 8 per cent over a period not exceeding the next 12 months and to 6 per cent over a period not exceeding the next 24 month period before formally adopting the recommended target of 4 per cent inflation with a band of +/- 2 per cent. 

Since food and fuel account for more than 57 per cent of the CPI on which the direct influence of monetary policy is limited,the commitment to the nominal anchor would need to be demonstrated by timely monetary policy response to risks from second-round effects and inflation expectations in response to shocks to food and fuel, the committee pointed out.