Skip to main content

Towards a rules-based policy

AReserve Bank-appointed committee headed by Deputy Governor Urgit Patel was asked to revise
and strengthen the monetary policy framework in India. In its core recommendations it wants monetary policy to formally move towards using headline CPI (Consumer Price Index) as its nominal anchor. Communicating the nominal anchor without any ambiguity will be a key task. The objective is to ensure a monetary policy regime shift away from the current approach, which has multiple objectives, to one that is centred on the target CPI. However, taking into account the current macroeconomic scenario, the committee has conceded the need for flexibility in inflation-targeting to enable the central bank to deal with other objectives in the short run. The ultimate goal is to contain CPI inflation within a target band of 4 per cent plus or minus 2 per cent. A smooth two-year transition is envisaged. From the current 10 per cent levels, CPI inflation is to be brought down to 8 per cent in 12 months and to 6 per cent in 24 months. Monetary policy will henceforth be conducted by a new Monetary Policy Committee which will have the Governor as its head and three senior officers of the RBI as its members. In addition, two outside experts will be nominated. All members will vote on the policy at meetings every two months. The MPC will be accountable for any failure to achieve the inflation target.
The committee has suggested crucial changes in the operating framework and instruments in the conduct of monetary policy. Its report has generally been received well by banks and financial markets. It enables policy formulation in a phased and transparent manner using a real policy rate as reference. Over the medium term, the recommendations will help develop a term money market, reduce fluctuations in market liquidity and remove distortions in interest rates. Its unrelenting focus on inflation is justified on several counts — India has the highest rate of inflation among G-20 countries. Inflation expectations are deeply entrenched and inflation at current levels is inimical to medium-term growth and macroeconomic stability. Understandably, Finance Ministry officials are not happy with proposals that would strengthen the central bank’s case for complete autonomy in matters of monetary policy. The fact that monetary policy has very little influence over high food inflation that has pushed up the CPI, could limit the efficacy of the new approach. All these do not detract from the fact that a shift to a rules-based policy framework recommended will replace the purely discretionary approach the RBI has followed so far, and is therefore to be welcomed.
Labels:

Comments

Post a Comment

Popular posts from this blog

SC asks Centre to strike a balance on Rohingya issue (.hindu)

Supreme Court orally indicates that the government should not deport Rohingya “now” as the Centre prevails over it to not record any such views in its formal order, citing “international ramifications”. The Supreme Court on Friday came close to ordering the government not to deport the Rohingya. It finally settled on merely observing that a balance should be struck between humanitarian concern for the community and the country's national security and economic interests. The court was hearing a bunch of petitions, one filed by persons within the Rohingya community, against a proposed move to deport over 40,000 Rohingya refugees. A three-judge Bench, led by Chief Justice of India Dipak Misra, began by orally indicating that the government should not deport Rohingya “now”, but the government prevailed on the court to not pass any formal order, citing “international ramifications”. With this, the status quo continues even though the court gave the community liberty to approach i...
3 comments
Click Here To Read more »

"ISRO has capabilities to build geostationary satellites for air quality monitoring” (downtoearth)

Pawan Gupta's findings on trans-boundary movement of pollution (Punjab to Delhi) from biomass burning in 2015 spurred debates. He participated in discussions with Indian regulators early September at the Better Air Quality Conference in Busan on the advantages of using satellite data for air quality monitoring. He explains to Down to Earth how air quality monitoring is done using satellite data. How is satellite data used to measure air pollution? Satellites that provide information on atmospheric pollutants are normally (not always) in the low earth orbits (400-1000 km above the Earth’s surface). A single satellite can carry one or more remote sensing instruments onboard that look down to earth and obtain information about the object in the field of view of satellite sensor. The Earth receives electromagnetic radiation from the sun, which travels through space and reaches the earth-atmosphere system. The radiation then interacts with the Earth’s atmosphere and the surface...
1 comment
Click Here To Read more »

What's ailing Namami Gange programme?(DTE)

Winters are extremely hectic for Sushma Patel, a vegetable grower in Uttar Pradesh’s Chunar town. Her farm is in the fertile plains of Ganga where people grow three crops a year. But this is the only season when she can grow vegetables. And before that, she needs to manually dig out shreds of plastic and wrappers from her one-hectare (ha) farm. “This is all because of the nullah,” she says, pointing at an open drain that runs through her field, carrying sewage from the neighbourhood to the Ganga. “Every monsoon, the drain overflows and inundates the field with a thick, black sludge and plastic debris. We cannot even go near the field as the stench of sewage fills the air,” she says. But Patel has no one to complain to as this is the way of life for most people in this ancient town. About 70 per cent of the people in Chunar depend on toilets that have on-site sanitation, such as septic tanks and pits. In the absence of a proper disposal or management system, people simply dump the faec...
3 comments
Click Here To Read more »