I.1 The conduct of monetary policy has undergone fundamental changes and regime shifts all over the world, mainly in response to the challenges and opportunities thrown up by structural changes in economic activity as well as by financial liberalisation and its outcomes. A clearer focus on price stability as a principal − though not necessarily the sole − objective of monetary policy has evolved through a broad consensus. With the deregulation of financial markets and globalisation, the process of monetary policy formulation has acquired a much greater market orientation than ever before. This has been accompanied by institutional changes even as central banks have strived for operational autonomy in pursuit of their goals.

I.2 The global financial crisis and its aftermath have posed formidable challenges for central banks and subjected their mandates to close scrutiny and re-evaluation in the face of unprecedented financial instability. In advanced economies (AEs), this has necessitated use of unconventional monetary policy tools including asset purchases and forward guidance. In the case of emerging market economies (EMEs), the conduct of monetary policy has been complicated by, inter alia, systemic externalities associated with monetary policies of advanced economies. Consequently monetary policy in emerging countries has been required to contend not only with supply shocks but also to manage external shocks emanating from surges and ebbs in capital flows, volatility in exchange rates and asset prices, and exit from their own (overly) accommodative policies.

I.3 India’s monetary policy framework has undergone several transformations reflecting underlying macroeconomic and financial conditions. In the post global financial crisis years particularly, there has been considerable debate around the monetary policy framework, especially due to the coexistence of persistent high inflation and sluggish growth.

I.4 Against this backdrop, Governor Dr. Raghuram G. Rajan, in a statement after assuming office on September 4, 2013 observed that:

The primary role of the central bank, as the RBI Act suggests, is monetary stability, that is, to sustain confidence in the value of the country’s money. Ultimately, this means low and stable expectations of inflation, whether that inflation stems from domestic sources or from changes in the value of the currency, from supply constraints or demand pressures. I have asked Deputy Governor Urjit Patel, together with a panel he will constitute of outside experts and RBI staff, to come up with suggestions in three months on what needs to be done to revise and strengthen our monetary policy framework. A number of past committees, including the FSLRC, have opined on this, and their views will also be considered carefully.

I.5 Accordingly, an Expert Committee to Revise and Strengthen the Monetary Policy Framework was appointed on September 12, 2013. The main objective of the Committee is to recommend what needs to be done to revise and strengthen the current monetary policy framework with a view to, inter alia, making it transparent and predictable.

I.6 The Committee comprised of:

Chairman:

1. Dr. Urjit R. Patel, Deputy Governor, Reserve Bank of India

Members:

2. Dr. P.J. Nayak
3. Professor Chetan Ghate, Associate Professor, Economics and Planning Unit, Indian Statistical Institute, New Delhi
4. Professor Peter J. Montiel, Professor of Economics, Williams College, USA
5. Dr. Sajjid Z. Chinoy, Chief Economist and Executive Director, J.P. Morgan
6. Dr. Rupa Nitsure, Chief Economist, Bank of Baroda
7. Dr. Gangadhar Darbha, Executive Director, Nomura Securities
8. Shri Deepak Mohanty, Executive Director, Reserve Bank of India

Member Secretary:

9. Dr. Michael Debabrata Patra, Principal Adviser, Monetary Policy Department, Reserve Bank of India

The Secretariat of the Committee comprised Dr. Mridul Saggar, Director, Department of Economic and Policy Research, Shri Sitikantha Pattanaik, Director, Monetary Policy Department, Dr. Praggya Das, Director, Monetary Policy Department and Dr. Abhiman Das, Director, Department of Statistics and Information Management.

I.7 The terms of reference of the Committee were:

1. To review the objectives and conduct of monetary policy in a globalised and highly inter-connected environment.

2. To recommend an appropriate nominal anchor for the conduct of monetary policy.

3. To review the organisational structure, operating framework and instruments of monetary policy, particularly the multiple indicator approach and the liquidity management framework, with a view to ensuring compatibility with macroeconomic and financial stability, as well as market development.

4. To identify regulatory, fiscal and other impediments to monetary policy transmission, and recommend measures and institutional pre-conditions to improve transmission across financial market segments and to the broader economy.

5. To carefully consider the recommendations of previous Committees/Groups in respect of all of the above.

The Committee commenced its work from September 26, 2013. The Memorandum appointing the Committee is at Annex A.

I.8 The Committee gained immensely from deliberations with experts/economists/analysts (Annex B). Helpful comments and suggestions were received from Professor Anil Kashyap, University of Chicago and Dr. Sujit Kapadia, Bank of England, which are greatly appreciated. The Committee also benefited from discussions with various officials in the Reserve Bank of India (RBI) including Shri Chandan Sinha, Principal Chief General Manager, Department of Banking Operations and Development; Shri G. Mahalingam, Principal Chief General Manager, Financial Markets Department; Dr. B. K. Bhoi, Adviser, Monetary Policy Department; Shri Jeevan Kumar Khundrakpam, Director, Monetary Policy Department; Shri A.K. Mitra, Director, Monetary Policy Department and Shri J. B. Singh, Assistant Adviser, Monetary Policy Department.

I.9 The Committee wishes to place on record appreciation for the team of resource persons who supported the Committee’s work. Drawn from the Monetary Policy Department, the Department of Economic and Policy Research and the Department of Statistics and Information Management, the contributions of resource persons, i.e., Dr. Saibal Ghosh, Shri Sanjib Bordoloi, Dr. Saurabh Ghosh, Dr. Snehal Herwadkar, Shri S. M. Lokare, Shri Asish Thomas George, Shri Rajesh Kavediya, Shri G. V. Nadhanael, Smt. Abhilasha and Shri Joice John are gratefully acknowledged. The Committee is appreciative of the administrative support from Smt. Indrani Banerjee, Shri P. B. Kulkarni and Shri M. Z. Rahman of the Monetary Policy Department and technical support from the Department of Information Technology.

I.10 The Committee had six formal meetings and a number of informal meetings.

I.11 The Report is organised in six chapters: Chapter II revisits the choice of nominal anchor for India’s monetary policy. Chapter III evaluates the effectiveness and transparency of organisational structure, operating framework and instruments of monetary policy. Chapter IV addresses various impediments to transmission of monetary policy. Chapter V discusses the conduct of monetary policy in a globalised environment and Chapter VI provides a summary of the Committee’s recommendations.