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Patel Committee proposed Retail inflation as new policy benchmark
Jan 22, 2014

An expert panel headed by Urjit Patel on monetary policy framework has proposed that retail inflation, measured by the Consumer Price Index (CPI) should replace wholesale inflation as the price anchor. 

The other proposals are:

  • Committee recommended setting up of a monetary policy committee (MPC) that will be headed by the Reserve Bank of India (RBI) governor and accountable for achieving inflation target set by it.

  • The responsibility of the central bankshould be to bring the retail inflation rate down at four per cent, with a variation of 200 bps on either side, in three years. “The nominal anchor should be defined in terms of headline CPI (-based) inflation, which closely reflects the cost of living and influences inflation expectations relative to other available metrics.

  • If the MPC fails to achieve its target for three quarters in a row, it has to issue a public statement, mentioning reasons for failure and remedial measures, with signatures of all the five members.

  • The lines between the government and RBI were set to be re-drawn if the recommendations of the committee were accepted.

  • Indicating a shift from a discretionary policy to a rule-based one, the panel has advocated adoption of a policy rate that is easily communicated and understood; it will be positive when inflation is above the nominal anchor.

  • The committee has also recommended that the government should ensure it brings down its fiscal deficit below three per cent of gross domestic product (GDP) by 2016-17 and does away with administered prices, wages and interest rates.

  • Further the panel has said that RBI’s open-market operations should be only for liquidity management and not for managing yields — a practice widely followed now, though not formally admitted to.

  • The panel has proposed a two-phased transition to the new operating framework. In the first phase, the weighted average call rate will remain the operating target and repo will continue as the single policy rate. It has emphasised the need for a spectrum of term repos of varying maturities, with 14-day as the anchor rate. In the second phase, the 14-day term repo will emerge as the policy rate.

  • The panel has also proposed reduction in statutory liquidity ratio of banks, more frequent intra-year resets for small savings schemes and revisiting the issue of interest-rate subvention to the farm sector. The panel has also said all fixed-income financial products be treated on a par with bank deposits for the purpose of taxation and TDS (tax deducted at source). 


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