Agreement on Monetary Policy Framework/Urjit Patel Committee on Inflation

The ‘Expert Committee to Revise and Strengthen the Monetary Policy Framework’, headed by then RBI Deputy Governor Urjit R Patel was constituted in 2015.

• 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.
• Some of the major recommendations of the Urjit Patel Committee were-
  • RBI should adopt the new Consumer Price Index (CPI) for anchoring the monetary policy.
  • Set the inflation target at 4% with a band of +/- 2% around it.
  • Monetary policy decision making should be vested in a Monetary Policy Committee (MPC) that should be headed by the Governor.
  • Eliminate administered prices (MSP on food grains, LPG cylinders)
  • Eliminate administered wages (MNREGA)
  • Eliminate administered interest rates (interest subvention given to farmers)
  • Implement Vijay Kelkar Committee’s recommendations on fiscal consolidation.
  • Religiously follow the guidelines & targets of FRBM
  • The two schemes- Dependence on Market Stabilization Scheme (MSS) and Cash Management Bills (CMBs) may be discontinue and the government debt and cash management must be taken over by the government’s Debt Management Office.
  • All fixed income financial products should be treated on par with the bank deposits for the purposes of taxation and TDS. 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.

Criticism

• With more emphasis on fixing monetary rate, RBI is losing its grip on the primary function of the central bank as a regulator. For example, rising NPAs are due to regulatory and supervisory failure of RBI.
• Over the years, the RBI monetary policy has become a non-event for the borrower. Even if the RBI cuts rates, that wouldn’t translate into a meaningful rate reduction for the borrower.
• Inflation monitoring is indeed important and so are the other regulatory aspects of RBI. Hence, RBI must ensure balance between the two

Conclusion

All the objectives of monetary policy, i. e., exchange stability, price stability, full employment, economic growth, etc., are important and have their relative merits and demerits; none of these objectives is completely undesirable and could be abandoned. But the problem is that these objectives are not compatible with each other and, therefore, cannot be achieved simultaneously, thereby making the task of ‘framing a balanced monetary policy’ even more difficult.