Mamata L4 P1 Urjit Patel Committee

8/12/2019 Mamata L4 P1 Urjit Patel Committee

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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. + consume

Urjit Patel

Dy. Governor

Revise and Strengthen Monetary policy framework


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Urjit Patel Committee

Expert Committee to Revise and Strengthen the Monetary PFramework

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


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Why target inflation?

Highest within G20 nations

Higher than its trade competitors => export competitivenessCPI 2008 2012

World 4 4

Brazil 5 5

China 6 10

S.Africa 11 6

Russia 14 5


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4 4

5 5

6

2.7

9

10.4

11

6

14

5

2008 2012

CPI from 2008 to 2012

World Brazil China

India S.Africa Russia


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Onion Rs./kg Money Buy?

1st Jan 20 100 5 kg

31st Dec 100 104 ~1 kg

Why target inflation?: Nominal vs Realinterest


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Why Indians buy gold?

Moneysaved in

Bank

NominalInterest

Rate

CPI (Inflation) Real Rate ofInterest=(Nominal

-Inflation)

SA 4.00% 11% -7%

FD 9.00% 11% -2%

Excessive gold import=>CAD=>Rupee

Weaken =>Petrol=>inflation (Vicious cycle)

Saving=>capital..X


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Nominal Anchor

Types

1. Exchange Rate (before WW1)2. Multiple indicator (GDP, IIP, Exchange rate, inflation)

3. Inflation (80s)


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Nominal Anchor: Exchange rate

Authorized dealers under

Volatility

$1 = 50

$1 = 60$1 = 65


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Pro

Fuel inflation kept in check. Easy to monitor

Clarity, well understood bypublic.

RBI has limited controlexternal factors- crudegold.

If we peg Rs. to $$ thevulnerable to shocks in

Nominal Anchor: Exchange Rate

Negative


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Indicators used:

1. IIP, Consumer confidence2. Professional forecasts (CRISIL,

S&P, Moody, World Bank):GDP, inflation, unemployment

3. Inflation: WPI minus food,

fuel.Focus:

Employment, GDP, inflation,exchange rate stable,

1998-2008 worked weanymore. GDP, Inflatio

2008: CPI ** double di

WPI: service sector >60

WPI commodity list revoften. (ice cream, ovenball, guitar.)

Impact after Lag of 3-4

Nominal Anchor: Multiple Indicator

Negative


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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 Mist

2. 2009: Rajan Financial sector reform

3. 2013: Financial Sector Legislative Reforms Commission (BN SriKrishna

Nominal Anchor: CPI why? (Proarguments)


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CPI: food+fuel > 50%.

Monsoon, blackmarket, $$

government policy (onion sugar export). [Urjit: coordination

CPI: previously: Industrial Worker, Urban Non Manual, Agri. Rural Laborer.

2011: Urban, Rural, Combine.=> [Urjit CPI combined.]

Nominal Anchor: CPI Negative


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Lower Limit? (2%)

Zero / negative inflation =bad.Deflation. Real rate interest.

Moderate level inflation goodfor economy.

Minimum 2%.

Nominal Anchor CPI: What target?

Upper limit (?%


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Lower Limit? (2%)

Zero / negative inflation =bad.Deflation. Real interest.

Moderate level

Minimum 2%.

Studies show CPI >6.2%for growth, exchange remployment, investme

Maximum: 6%.


Upper limit (6%


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Lower Limit? (2%)

Zero / negative inflation =bad.Deflation. Real interest.

Moderate level

Minimum 2%.

Studies show CPI >6.2%for growth, investment

Maximum: 6%


Upper limit (6%

1. Target 4% CPI. Band: (+/-) 2%

2. unanticipated shocks: food, fuel.

3. transparency and predictability

Country Target Ban

Mexico 3 1

South

Africa

3-6%

Israel 1-3%

N i l A h 4% CPI Wh ?


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Chile:

90s CPI 25%

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

Nominal Anchor 4% CPI: When?Timeframe

0 12 24

Target 10% 8% 6%

10%

8%

6%

0%

2%

4%

6%

8%

10%

12%

URJITS TARGET FOR INDIA


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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 28thJan. 2014

Nominal Anchor 4% CPI: How? RBI

Repo

(8%)*


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Urjit has recommended thatRepo rate should be "positive"

meaning higher than CPI. Hawkishstand: A hawk favors

high interest rates to keepinflation low.

Result=> deflation, growth killed.

Counter: Aus, Canada, S.Africa,Mexico, Brazil, Israel all have thissystem.

Atpresent AfterUrjit

Repo ~8 10

CPI ~9 ~9

Difference

-1 +1

Critiques: Why interest rates will rise


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Inflation (upward price Movement)

Policy rate=>increase Banks borrow less

People borrow less

Low investment, expansion

Low employment Low income

Low demand

Low price level

Policy rate=>decrease

Expansion of credit.

Monetary Policy: Cyclic fluctuation

Deflation (downw


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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?


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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%)

Nominal Anchor 4% CPI: How?Government?


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Monetary Policy: accountability in In

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 R3-4/year.

Monetary policy made by Governor alone. (sign.)


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Monetary Policy: accountability in In

policy making: Internal

Dy.Governor and board of directors meetings.

2005: Pre-policy consultation meeting with noted economisindustrial bodies, Credit rating agencies

Report put on website.

Quarterly review: media conference

OVERALL No formal accountability mechanism.


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Urjit: Fixing accountability

Governor single Decision Maker..x.

All economics use Committee system to decide monetary po

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.


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Monetary Policy: accountability in India (previou

Tarapore, Reddy, FSLRC have recommended:

1. Minutes of meeting in public domain

2. Formulate monetary policy by vote

3. Explain Failures.


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Urjit: Monetary Policy: accountability in India (Sugges

Setup Monetary policy Committee (MPC)

1. Chairman: Rajan

2. VC = dy. Governor3. Memberinternal. ( Executive director)

Two members- external (finance, economics etc.). Can access rec 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.


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Urjit: Monetary Policy: accountability in India (Sugges

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.

C


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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.

M i iti


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Mains answer writing

2011: Salient recommendations of the RBI-appointed Damocommittee on customer service in Banks. (12m / 150 words

Formed in 2010

Gave report in 2011.

GS2 GS3


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GS2, GS3

Write a note on the recommendations of D

Urjit Patel Committee to strengthen monepolicy framework in India. (10m | 200 wor

Q ti R d ti 200


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Question: Recommendations. 200 w

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.

A d ti ?


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Answer: recommendation?

Dr. Urjit Patel Committee was formed by RBI to revise and sthe Monetary policy framework in India.

The salient recommendations of the Committee are as follo

1. CPI as Nominal Anchor : 4% (2%); 10/8/6

2. To achieve this target, Committee has recommend governfollow the path of Fiscal consolidation: (3% 2016, kelkar) s

3. Accountability: MPC, structure, decision by majority vote,4. Misc.

Conclusion: not necessary.

I t i


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Interview

1. Despite frequent revisions in monetary policy rates, RBI hto contain inflation in recent times. Why?

2. (role playing) What will you do? If youre made the govern

3. (role playing) What will you do? If youre made the FinancMinister of India?

Documents

Mamata L4 P1 Urjit Patel Committee