Committees by RBI

Bimal Jalan
Retired governor
New Bank Licenses
Feb 2014 report given

Nachiket Mor
RBI board of directors.
Financial products for small businessmen and low income household.
Financial inclusion: banking, credit, investment, insurance. + consumer protection

Urjit Patel
Dy. Governor
Revise and Strengthen Monetary policy framework
Urjit Patel Committee
Expert Committee to Revise and Strengthen the Monetary Policy
Framework
September 2013
Report in 3 months=> Jan 2014 report.
PJ Nayak, Chetan Ghate et al.
Recommendation:
1. RBI Target inflation
2. Government help RBI
3. RBI fix accountability
Why target inflation?
Highest within G20 nations
Higher than its trade competitors => export competitiveness ..X
CPI 2008 2012
World 4 4
Brazil 5 5
China 6 <3
India 9 >10
S.Africa 11 6
Russia 14 5
 CPI from 2008 to 2012

14

11
10.4
9

6 6
5 5
4 4
2.7

2008 2012

World Brazil China

India S.Africa Russia
Why target inflation?: Nominal vs Real interest
Onion Rs./kg Money Buy?

1st Jan 20 100 5 kg

31st Dec 100 104 ~1 kg

Why Indians buy gold?

Money Nominal CPI (Inflation) Real Rate of

saved in Interest Interest=(Nominal
Bank Rate -Inflation)
SA 4.00% 11% -7%
FD 9.00% 11% -2%

Excessive gold import=>CAD=>Rupee

Weaken =>Petrol=>inflation (Vicious cycle)
Saving=>capital..X
Nominal Anchor
Types
1. Exchange Rate (before WW1)
2. Multiple indicator (GDP, IIP, Exchange rate, inflation)
3. Inflation (80s)
 Nominal Anchor: Exchange rate
Volatility
$1 = 50
$1 = 60
$1 = 65

Authorized dealers under FEMA

Nominal Anchor: Exchange Rate
Pro
Fuel inflation kept in check.
Easy to monitor
Clarity, well understood by
public.
Negative
RBI has limited control over
external factors- crudeoil and
gold.
If we peg Rs. to $$ then India
vulnerable to shocks in US.
Nominal Anchor: Multiple Indicator
Indicators used:
1. IIP, Consumer confidence
2. Professional forecasts (CRISIL,
S&P, Moody, World Bank):
GDP, inflation, unemployment
3. Inflation: WPI minus food,
fuel.
Focus:
Employment, GDP, inflation,
exchange rate stable,
Negative
1998-2008 worked well. But not
anymore. GDP, Inflation.
2008: CPI ** double digit (>10)
WPI: service sector >60%GDP.
WPI commodity list revised
often. (ice cream, oven, cricket
ball, guitar.)
Impact after Lag of 3-4 quarters.
Nominal Anchor: CPI why? (Pro arguments)
Easy to monitor: CPI (combined) 12 days lag.
Pressure Group..x (SLR, EXIM, Oil-Subsidy)
AE, EME central banks. (except India, China).
Transparency, public can understand.
Others recommended:
1. 2007: Mumbai as International Finance Center. Percy Mistry
2. 2009: Rajan Financial sector reform
3. 2013: Financial Sector Legislative Reforms Commission (FSLRC),
BN SriKrishna
Nominal Anchor: CPI Negative
CPI: food+fuel > 50%.
Monsoon, blackmarket, $$
government policy (onion sugar export). [Urjit: coordination]
CPI: previously: Industrial Worker, Urban Non Manual, Agri. Laborer,
Rural Laborer.
2011: Urban, Rural, Combine.=> [Urjit CPI combined.]
Nominal Anchor CPI: What target?
Lower Limit? (2%) Upper limit (?%)
Zero / negative inflation =bad.
Deflation. Real rate interest.
Moderate level inflation good
for economy.
Minimum 2%.
Nominal Anchor CPI: What target?
Lower Limit? (2%)
Zero / negative inflation =bad.
Deflation. Real interest.
Moderate level
Minimum 2%.
Upper limit (6%)
Studies show CPI >6.2% = bad
for growth, exchange rate,
employment, investment.
Maximum: 6%.
Nominal Anchor CPI: What target?
Lower Limit? (2%)
Zero / negative inflation =bad.
Deflation. Real interest.
Moderate level
Minimum 2%.
Upper limit (6%)
Studies show CPI >6.2% = bad
for growth, investment.
Maximum: 6%

Country Target Band

1. Target 4% CPI. Band: (+/-) 2% Mexico 3 1
2. unanticipated shocks: food, fuel. South 3-6%
Africa
3. transparency and predictability Israel 1-3%
Nominal Anchor 4% CPI: When? Timeframe
Chile: URJITS TARGET FOR INDIA
90s CPI 25% 12%

10%
2000s: CPI target 3% (+/- 1% band) 10%

8%
8%

6%
6%

4%
4%

2%

0%
0 12 24 36
Target 10% 8% 6% 4%
Nominal Anchor 4% CPI: How? RBI?
Repo
(8%)*

Policy rate= LAF repo Rate

Decided by voting in MPC.
Reverse repo=-1% (100 basis point)
MSF=+1%
Spread +1/-1 should not be changed frequently.
* on 28th Jan. 2014
Critiques: Why interest rates will rise?
Urjit has recommended that
Repo rate should be "positive"
At After
meaning higher than CPI.
present Urjit
Hawkish stand: A hawk favors Repo ~8 10
high interest rates to keep
inflation low. CPI ~9 ~9
Result=> deflation, growth killed. Difference -1 +1
Counter: Aus, Canada, S.Africa,
Mexico, Brazil, Israel all have this
system.
Monetary Policy: Cyclic fluctuation
Inflation (upward price Movement) Deflation (downward)
Policy rate=>increase Policy rate=>decrease
Banks borrow less Expansion of credit.
People borrow less
Low investment, expansion
Low employment
Low income
Low demand
Low price level
Urjit Patel Committee
Expert Committee to Revise and Strengthen the Monetary Policy
Framework
Recommendation:
1. RBI Target inflation:
1. Nominal Anchor CPI (combined)
2. 4% (2%)
3. 10/8/6=> 0/12/24
2. Government help RBI
3. RBI fix accountability
Nominal Anchor 4% CPI: How? Government?
MNREGA: wage increasedyes. Productive growthno?
Food security: production increase? MSP, subsidy leakage.
Administered pricex
Interest rate subvention..x
Fiscal consolidation
Vijay Kelkar report implement (Mrunal/Economy)
Fiscal respo. And budget Management 2013 (FRBM).
2016-17: fiscal deficit GDP 3% (present ~5%)
Monetary Policy: accountability in India
RBI Act.
Governor directly accountable to Government of India.
Govt. can issue directives to RBI in public interest.
Parliaments standing Committee on finance- can summon Rajan. Avg.
3-4/year.
Monetary policy made by Governor alone. (sign.)
Monetary Policy: accountability in India
policy making: Internal
Dy.Governor and board of directors meetings.
2005: Pre-policy consultation meeting with noted economists,
industrial bodies, Credit rating agencies
Report put on website.
Quarterly review: media conference
OVERALL No formal accountability mechanism.
Urjit: Fixing accountability
Governor single Decision Maker..x.
All economics use Committee system to decide monetary policy.
5-10 members.
Government side not represented. (- Colombia, Philippines)
Meet every 1-2 months
Accountable to parliaments legislative Committees.
Publish their reports.
Target Miss: Dismiss..X. No reappointment.
Monetary Policy: accountability in India (previous)
Tarapore, Reddy, FSLRC have recommended:
1. Minutes of meeting in public domain
2. Formulate monetary policy by vote
3. Explain Failures.
Urjit: Monetary Policy: accountability in India (Suggestion)
Setup Monetary policy Committee (MPC)
1. Chairman: Rajan
2. VC = dy. Governor
3. Member internal. ( Executive director)
Two members- external (finance, economics etc.). Can access records.
Office of profit . x
Conflict of interestx
Term: 3 years, Non-renewable.
Decision by Majority Voting. Casting vote: Rajan / Dy.Gov.
Meet once every two months.
Minutes of meeting- publish.
Bi-annual report publish.
Urjit: Monetary Policy: accountability in India (Suggestion)

Target: 4% (2% band)= 2-6% .

Failure?? Three quarters successively.
MPC issue public statement
1. Each member will sign it
2. Reasons for failure
3. Action proposed
4. Time-frame for result.
Urjit Patel Committee
Expert Committee to Revise and Strengthen the Monetary Policy
Framework
Recommendation:
1. RBI Target inflation:
1. Nominal Anchor CPI (combined)
2. 4% (2%)
3. 10/8/6=> 0/12/24
2. Government help RBI=> fiscal deficit.
3. RBI fix accountability=> MPC.
Mains answer writing
2011: Salient recommendations of the RBI-appointed Damodaran
committee on customer service in Banks. (12m / 150 words.)
Formed in 2010
Gave report in 2011.
GS2, GS3
Write a note on the recommendations of Dr.
Urjit Patel Committee to strengthen monetary
policy framework in India. (10m | 200 words)
Question: Recommendations. 200 words.
3 month report. Sept. 13=>Jan 14
Nachiket, Bimal Jalan, Urjit Patel
Urjit Patel Dy. Governor
Mandate
Criticism, Hawakish stand, Interest rate, deflationary.
Brazil, Mexico.
Filler lines about past Committee: FSLRC, Percy Mistry.
Answer: recommendation?
Dr. Urjit Patel Committee was formed by RBI to revise and strengthen
the Monetary policy framework in India.
The salient recommendations of the Committee are as following:
1. CPI as Nominal Anchor : 4% (2%); 10/8/6
2. To achieve this target, Committee has recommend government to
follow the path of Fiscal consolidation: (3% 2016, kelkar) subsidy.
3. Accountability: MPC, structure, decision by majority vote, failure.
4. Misc.

Conclusion: not necessary.

Interview
1. Despite frequent revisions in monetary policy rates, RBI has failed
to contain inflation in recent times. Why?
2. (role playing) What will you do? If youre made the governor of RBI.
3. (role playing) What will you do? If youre made the Finance/Agri.
Minister of India?