Urjit Patel Committee

Urjit R Patel (born 28 October 1963) is an eminent economist, consultant, and banker, currently serving as Deputy Governor of the Reserve Bank of India. He was also Advisor of the Boston Consulting Group. As Deputy Governor of RBI, Dr. Patel looks after Monetary Policy, Economic Policy Research, Statistics and Information Management, Deposit Insurance, Communication and Right to Information.

The Urjit Patel Committee report to revise and strengthen the monetary policy framework suggests some sweeping changes to overhaul the existing operating structures including a shift to CPI as the nominal anchor for inflation and moving to a model followed by the Federal Reserve to set up a monetary policy committee headed by the governor to vote on rate decisions. It also lays out a prescriptive roadmap to bring down inflation and makes recommendations for the government to reduce its fiscal deficit.

Read Also: Fiscal Policy

The Expert Committee headed by RBI Deputy Governor Urjit R Patel (The person is also known for UPA II 100 days action program) submitted its report to Revise and Strengthen the Monetary Policy Framework.

The main recommendations of committee are as follows:-

  • RBI should adopt the new Consumer Price Index (CPI) as the measure of the nominal anchor for the policy framework.
  • The nominal anchor or the target for inflation should be set at 4 per cent with a band of +/- 2 percent around it.
  • The monetary policy regime must shift away from the current approach to one that is centred around the nominal anchor new CPI only.
  • Inflation from the current level of 10 per cent to be brought down to 8 percent 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 percent inflation with a band of +/- 2 percent.
  • The committee asked the Central Government to ensure that the fiscal deficit as a ratio to Gross Domestic Product is brought down to 3.0 percent by 2016-17.
  • That the monetary policy decision-making should be vested with a Monetary Policy Committee (MPC). It went on to recommend that the Governor of the RBI should be the Chairman of the MPC. The term of office of the MPC could be three years, without the prospect of renewal.
  • All fixed income financial products should be treated on a par with bank deposits for the purposes of taxation and Tax Deduction at Source.
  • The RBI 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.

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Inflation based on Consumer Price Index (CPI) was 9.87% in December while Wholesale Price Index (WPI)-based inflation was 6.16% during the same month. Currently, RBI tracks WPI inflation as the primary price indicator even as it takes into account all types of inflation numbers before drafting the monetary policy.

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.

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 percent 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.

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