The key recommendations by Urjit Patel Committee Report to Review and Strengthen the Monetary Policy Framework are as follows:
(i) The headline Consumer Price Index (CPI) should be the nominal anchor
for monetary policy and the Reserve Bank of India (RBI) should make
this the predominant objective.
(ii)The nominal anchor for inflation should be set for a two-year
horizon at 4 per cent with a band of plus or minus 2 per cent. Since the
present CPI inflation is 10 per cent the Committee recommends a ‘glide
path’ of 8 per cent for January 2015 and 6 per cent for January 2016.
(iii) The Central Government needs to reduce the fiscal deficit to 3.0
per cent of GDP by 2016-17. Administered prices, wages and interest
rates are impediments to transmission of monetary policy and should be
eliminated.
(iv) Monetary policy decisions should be vested in a Monetary Policy
Committee (MPC) comprising the Governor, the Deputy Governor and
Executive Director in charge of monetary policy and two external
full-time members. The decisions of the MPC will be by voting. Members
will be accountable for failure to attain the target—failure being
defined as inability to attain the target for three successive quarters.
(iv)The real policy rate should be positive. In the first phase the
weighted average call rate would be the operative target and the repo
rate would be the single policy rate. The funds available at the repo
rate would be restricted and increasingly liquidity would be provided at
the 14 day term repo; longer-term repo auctions should be introduced.
(v) In the second phase, the 14-day repo rate would be the operative
target and recourse to outright two-way open market operations (OMO)
would determine liquidity. OMO should not used to manage yields on
government securities.
(vi)There should be a remunerated standing deposit facility at the RBI to sterilise excess liquidity.
(vii) With an independent debt management office, the market
stabilisation scheme and cash management bills should be phased out.
(viii) All sector specific refinance should be phased out as committed to the Asian Development Bank in 1992.
