Recommendations Of Urjit Patel Committee
Official name : Expert Committee to Revise and Strengthen the Monetary Policy Framework
The key recommendations of the Urjit Patel Committee are:
- 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.
- 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.
- 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.
- 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.
- All fixed income financial products should be treated on par with the bank deposits for the purposes of taxation and TDS.
- 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.
- Detachment of Open Market Operations (OMOs) from the fiscal operations and instead linked solely to the liquidity management. OMO should not used to manage yields on government securities.
- There should be a remunerated standing deposit facility at the RBI to sterilise excess liquidity.
- The two schemes- Dependence on Market Stabilisation Scheme (MSS) and Cash Management Bills (CMBs) should be discontinue and the government debt and cash management must be taken over by the government’s Debt Management Office.
- All sector specific refinance should be phased out as committed to the Asian Development Bank in 1992.
Government’s Response
Based on RBI’s Report of the Expert Committee to Revise and Strengthen the Monetary Policy Framework (2014, Chairman: Dr Urjit R Patel), a formal transition was made in 2016 towards flexible inflation targeting and a six member Monetary Policy Committee (MPC) was constituted for setting the policy repo rate.
The Central Government notified in the Official Gazette dated August 5, 2016, that the Consumer Price Index (CPI) inflation target would be 4% with ± 2% tolerance band for the period from August 5, 2016 to March 31, 2021.
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