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Monetary Policy Reform: Urjit Patel Committee Recommendations (Part2)

Monetary Policy Reform: Urjit Patel Committee Recommendations (Part2)

By Yutika Agarwal

The Urijit Patel Committee further recommends that the nominal anchor or target should be set at 4 per cent with a band of +/- 2 per cent around it with a view of the vulnerability to external shocks that the economy can face and the relatively large weight of food in the CPI. Also, because of the need to avoid a deflation bias in the conduct of monetary policy the target should be set in the frame of a two-year horizon that is consistent with the need to balance the output costs. The aim of the committee is to reach the desired target gradually by 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 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. The Committee is also of the view that this transition path should be clearly communicated to the public. Since food and fuel account for more than 5 to 7 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.

With the other recommendation the reports entitles the need of Institutional requirements in making the report a reality rather than a dream on papers. The Committee is of the view that to achieve the goal of reduced central government deficit to 3 per cent of GDP by 2016-17, the Government must set a path of fiscal consolidation with zero or few escape clauses; ideally this should be legislated and publicly communicated.

Also, consistent with the Fiscal Responsibility and Budget Management (Amendment) Rules, 2013, the Central Government needs to ensure that its fiscal deficit as a ratio to GDP is brought down to 3.0 per cent by 2016-17. Administered setting of prices, wages and interest rates are significant impediments to monetary policy transmission and achievement of the price stability objective, requiring a commitment from the Government towards their elimination. Finally, communication and transparency is important for any monetary policy framework, but more so for flexible inflation targeting. There are several factors that demand clearer communication on monetary policy. First, every democratic society requires public institutions that are accountable. The central bank must explain how it uses its monopoly power over money to attain the goals assigned to it by the elected government. Secondly, in a market economy, a central bank has to rely on financial markets for transmission of its policies. It must, therefore, provide frequent assessments on macro-financial conditions. This is necessary for enhancing policy effectiveness and containing destabilising expectations.

However, with such high-end expectations the report is still a distant dream and seems unachievable in the desired time span. Also, with the political instabilities hovering the country this report might also be one of the buried files in the government institutions and by the time they start acting the deadlines must have been long gone.

I am a second semester student of M.Sc. Economics at TERI University, Vasant Kunj. I have graduated n Statistics from Ramjas College, University of Delhi. The interest in subject encouraged me to pursue a masters in Economics. I like to read, dance and play badminton. I have worked as an associate analyst in the quality and risk management department in Ernst & Young, GSS, Gurgaon for a span of 8 months post my graduation.


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