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:
- Dr. Urjit R. Patel, Deputy Governor, Reserve
Bank of India
Members:
- Dr. P.J. Nayak
- Professor Chetan Ghate, Associate Professor,
Economics and Planning Unit, Indian
Statistical Institute, New Delhi
- Professor Peter J. Montiel, Professor of
Economics, Williams College, USA
- Dr. Sajjid Z. Chinoy, Chief Economist and
Executive Director, J.P. Morgan
- Dr. Rupa Nitsure, Chief Economist, Bank of
Baroda
- Dr. Gangadhar Darbha, Executive Director,
Nomura Securities
- Shri Deepak Mohanty, Executive Director,
Reserve Bank of India
Member Secretary:
- 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:
-
To review the objectives and conduct of
monetary policy in a globalised and highly
inter-connected environment.
-
To recommend an appropriate nominal
anchor for the conduct of monetary policy.
-
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.
-
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.
-
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.
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