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[Economy] RBI Urjit Patel Committee: 4% CPI, Nominal Anchor,Multiple Indicator, Monetary Policy Framework Reforms (Part 1of 2)

1. Prologue2. Monetary Policy: Where to focus?

1. #1: Focus on Exchange rate2. #2: Focus on Multiple indicators3. #3: focus on inflation

1. Nominal anchor (CPI) method: Benefits/Advantages of2. Nominal anchor (CPI) method: Drawbacks/Limitations/Anti-arguments

3. Why Target inflation?

1. Nominal vs Real interest rate2. Nominal Anchor (CPI): the 4% Target3. Nominal Anchor CPI 4%: WHEN to reach?4. Nominal Anchor CPI 4%: How to reach?

4. Hawkish trend: Why interest rates will rise?5. Mock Questions

PrologueThis article wont make much sense, unless youre thorough with the concepts of monetary policy: its functions,tools and limitation. So make sure youve read the previous article. click me.

Place: RBIs Main Adda @MumbaiTime: September 2013Boss: Rajan has recently taken charge as the new governor of RBI. Immediately he setups threeCommittees:

Chairman Occupationin RBI

Topic Result

BimalJalan

RetireGovernor

New Bank licenses Work in progress.

NachiketMor

Boardmember

Financial products/ Financialinclusion

Published report in January 2014.Discussedin earlier articles.

Urjit Patel DeputyGovernor

Monetary policy framework: how tostrengthen it?

Published report in Jan14. This is the topicof our article.

Urjit Patel Committee: Basics1. Formed by: RBI (and not finance ministry)2. Official name: Expert Committee to Revise and Strengthen the Monetary Policy Framework3. Chairman: Dr. Urjit Patel, Dy. Governor of RBI4. Eight Members: economics professors, finance experts etc. Theyre not important for exams, because No

high profile members. [may be because Nachiket took away all the high profile members like ShikhaSharma of Axis bank, so Urjit bhai was left with only chillar parties.]

Overall, Urjit Patels main recommendations can be summarized in just three lines:

1. @Rajan, you fight inflation. [Nominal anchor, 4% CPI and everything]2. @Rajan, you fix accountability in your own gang. [form MPC Committee, decisions by voting etc.]3. @Chindu, you give cover-fire to Rajan, while he is fighting inflation. [fiscal consolidation.]

Lets start with first recommendation.

Urjit My first recommendation is that RBI must target inflation only. Nothing else- dont focus on increasingemployment, dont focus on increasing growth, dont focus on stabilizing rupee-dollar exchange rate.Just focus on one thing and one thing only- Inflation.

Mohan But why focus on inflation only?Urjit Observe.

Monetary Policy: Where to focus?

There are three main ways to frame monetary policy

1. Focus on Exchange Rate2. Focus Multiple indicator (GDP, IIP, Exchange rate, inflation)3. Focus on Inflation (started in 80s)

Lets check the pros and cons of each strategy.

#1: Focus on Exchange rateIf RBI adopts this strategy/method to frame monetary policy then- what will happen?Rajan will first decide an ideal target exchange rate say 1$=Rs.50.Then hell try to amend monetary policy to control rupee supply in the market.

To put this in technically incorrect example: Imagine dollars are apples.

Prices of apple vs Rupee are decided by laws of supply and demand.At present 1 apple sells for Rs.60. But Rajan wants to bring it 1 Apple=50 rupees. What should he do?

1. Rajan will tweak his monetary policy to reduce the supply of rupee in the market. Then, 1 apple will sell forRs.50. (apple supply is same but rupee supply is decreased.)

2. Alternatively, Rajan will open his own refrigerator (forex reserve), and put some apples (dollars) for sale.Thatll also bring down prices of 1 apple =50 rupees. (because apple supply increased)

Advantages/Benefits of targeting Exchange rate?1. Prices of imported goods are kept in check.2. Prices of imported crude oil is kept in check. (so indirectly inflation is kept in check).3. Since exchange rates are kept stable- both importers and exporters can decide their business expansion

plans accurately. (compared to a situation where exchange rate is volatile-say today $1=40 Rs. Andtomorrow $1=60Rs. Then it is not good for business decisions.)

4. Clarity. Transparency in Decision Making. Aam Juntaa can understand what RBI is trying to accomplishand whether Rajan is succeeding or failing? (if they ever get free after watching cricket matches, Saas-Bahu serials and (un)reality shows.)

Disadvantages/limitations of targeting Exchange rate?1. This method works well to control (imported) fuel inflation. But cannot control (local) food inflation.

1. Works well for a small countries. Because their population is small, they can even import food from India,China and just focus on export competitiveness in electronics and consumer goods. e.g. Singapore,Taiwan etc.

2. But Doesnt work for large countries like India, Mexico or Brazil. Our population is so large, we cannotsustain on imported food. We must be self-reliant in food production.

3. Country becomes vulnerable to external shocks. Continuing the previous example of Apple vs Rupee

1. What if American RBI tightens their own monetary policy to control local American inflation (= USFeds follow a dear money policy =dollar (apple) supply is reduced.)

2. Then Rajans statistical projections will go wrong. Hell have to make new adjustments in Rupee vsDollar (Apple) quantity in Indian market.

4. Government is bogus, and causes high food inflation. Result= Real interest rates become negative,Juntaa will start investing more in gold=>Gold import increased=>payments have to be made in Dollar.This also creates imbalance in supply-demand of rupee vs Dollars (Apples). Rajan will have hard timecontrolling this mess.

5. Country becomes vulnerable to Speculative attacks. e.g. Forex traders in Europe or China decide to hoardApples (dollars) in their refrigerator to create artificial shortage in market, so later then can sell their apples@higher rate. In such speculative attacks, Rajan will have hard time controlling supply-demand of Rupeevs dollars. He cannot prosecute them under FERA/FEMA laws, those traders live outside his jurisdiction.

6. Outdated: During WW1 era, most central banks used to follow this Exchange rate targeting strategy. Buttoday, almost all banks in developed countries, have shifted to inflation targeting strategy. Only fewexceptions- like Singapores RBI use this strategy.

Moving to next method/strategy

#2: Focus on Multiple indicatorsAt present, this is the strategy RBI uses for making monetary policy.

Under multiple indicator method, Rajan will first gather information about:

1. Index of industrial production (IIP), Consumer confidence2. Professional forecasts (CRISIL, S&P, Moody, World Bank) about GDP, inflation, unemployment

3. Inflation data: WPI minus food, fuel.

Then, he will design the monetary policy (mainly repo rate), with following objectives/focuses:

1. Increase employment2. Increase GDP3. Stabilize inflation4. Stabilize exchange rate

Sounds fair enough? Not really!

Multiple indicator method: Negative points/ Limitations1. Multiple indictor method has no nominal anchor- no actual target. What exactly are you trying to

accomplish? Bring down WPI by 5%, raise GDP to 9%..no such targets. Just bol-bachhan. Thereforeineffective.

2. Multiple indicator strategy worked well between 1998 and 2008. GDP was good and inflation was kept incheck. But in recent times, this strategy is no longer working- inflation has skyrocketed and GDP is fallingday by day.

3. Since 2008, Consumer price index rose to double digits (i.e. 10% or more)4. But RBI doesnt focus on CPI. They only focus on WPI (minus food and fuel). Result?

1. WPI doesnt track changes in the service sector related inflation (e.g. doctor, physiotherapist, IT, callcenter etc.)

2. Service sector contributes more than 60% of GDP. So, when monetary policy is designed withoutconsidering service sector inflation=then itll be ineffective.

5. WPI commodity list has been revised in recent times- they added ice cream, oven, cricket ball, guitar andso on. Result?

1. RBI has to make new statistical calculation about each of such busines arenas- number of peopleemployed in it, total bank loans given, their contribution to GDP etc.

2. But when WPI commodity list is revised, RBI has to calculate new statistical projections= problem.Policy doesnt give effective result in the meantime.

6. Even if Rajan makes best policy, its Impact will be seen after a lag of 3-4 quarters (i.e. nine to twelvemonth). Why? We already learned the limitations of Monetary policy in a developing country, the pastarticle. Click me

7. Since this strategy doesnt have a clear cut transparent targets, it becomes vulnerable to various pressuregroups. For example

Pressuregroup

informally forces Rajan to:

ChinduPlease increase SLR ratio. That way government is able to sell more of its securities tothe banks and- arrange cash from more schemes to increase employment- after all thatswhat you want- increase employment!Secondly, please increase the quota for women under Priority sector lending becauseRahul baba has been advocating women empowerment everywhere, including @ArnabGoswamis interview.

Exporters/ITcompanies

Rajan Bhai, please tweak your monetary policy in such way that $1=becomes 1000rupees, then we earn more rupees while exporting goods n services abroad.

ImportersPlease design your monetary policy in such way that $1 = Rs.1. then weve to spend lessrupees while importing stuff from abroad.

FICCIPlease decrease Priority sector lending, CRR and SLR that way more money is left forbusiness loans for corporate giants.

BankersMaai baap, please reduce PSL targets, SLR, CRR and Repo, that way more money is leftwith us, and we can lend it to middle class and businessmen.

Therefore, Urjit recommends Rajan to dump this multiple indicator method.

Mohan Ok boss. So far Ive learned following:1. Monetary policy should not focus on exchange rate because our country is very large, unlike

Singapore and Taiwan.2. Monetary policy should not focus on multiple indicator approach, because of the limitations

we just saw in above paragraph.Then what is your solution?

Urjit Simple. Focus on inflation

#3: focus on inflationIn this strategy- Rajan will decide a Nominal Anchor say CPI -to monitor inflation. Then hell fix an inflation-target say 2-6% and adjust his monetary policy so that inflation remains within that range.

Nominal anchor (CPI) method: Benefits/Advantages of1. Once Rajan sets a CPI target. Noone can influence him or put informal pressure- be it Chindu, Exporters,

Importers, FICCI, Mallya, Ambani or Bankers cannot influence Rajans policy. Because Rajan2. Easy to track progress. Because CPI data released after every twelve days.3. Central banks in all advanced economies and Emerging market economies have adopted this method.

(Except India and China).4. It brings transparency. Even aam-juntaa can understand what RBIs policy is and whether its yielding

result or not? Because there is only target to monitor=CPI.

Previous Committees have also directly/indirectly recommended for this system. For example:

year Committee Chairman2007 Mumbai as International Finance Center Percy Mistry2009 Financial sector reform Rajan the Boss himself2013 Financial Sector Legislative Reforms Commission (FSLRC) BN SriKrishna

Nominal anchor (CPI) method: Drawbacks/Limitations/Anti-arguments

Mohan Hold on a second. Youre trying to paint a very rosy picture. But if Rajans monetary policy tries tocontrol CPI, itll have many problems!

Urjit Such as??Mohan In CPI index- more than 50% weightage is given to food and fuel components.

Food prices= depend on monsoon and blackmarketers. Rajan has absolutely zero control overthis.Fuel/crude oil prices= depend on external factors and Rupee-Dollar exchange rate. Rajandoesnt have sufficient forex reserves to control rupee-dollar exchange rate in the manner hewants (e.g. 1$=50 rupees and not 1$=60 Rs.)

UrjitYoure right. But under multiple indicator method, Rajan focuses on WPI (minus food and fuelinflation).Thats why his policy has remained ineffective in controlling inflation.Because he alwaysignored food and fuel inflation.Infact, We must focus on CPI for the very same reason-because it give >50% weightage tothe food and fuel inflation.

Mohan Point taken. But in India, we have three CPIs: Urban, Rural and Combinedif we try to control allthree of them, then..

Urjit No problem. We must focus only on CPI (Combined). Its data is released @every 12 days. Very easyto monitor, tracks price movement all over India.

Mohan Ya but still, Its data is not accurate and.Urjit yaar if you start to find fault in everything ( like a TheH**** columnist), .then only God can help you.

Fidel Castro and Che Guevara cannot fix Indias inflation problem. This only gets fixed from inside theRBI!

Mohan But even if Rajan focuses on this Nominal Anchor (CPI), still there will be a lag of 6-8 months beforeits impacts are seen.

Urjit Brother, no matter which method we use there will be lag of 6-8 months before its impact is seen oninflation @ground level.

Because we are not a developed country, we are a developing country.Weve already learned this limitation of monetary policy in developing countries. Click me.

Mohan Ok one last obstacle. Governments own policy to fight CPI. For example, whenever prices of sugar,onion or pulses get very high, the government arbitrarily puts export ban on those commodities, startimporting them from xyz country, starts distributing them @subsidized rates in various cities.

Urjit So?Mohan So Rajan may be designed his policy to fight CPI using abc statistical projections but at random, the

government will do xyz policy on its own to fight inflation= Rajans statistical projections will becomewrong and his monetary policy will become #EPIFAIL.

Urjit For this I recommend better coordination and data sharing between Government of India and RBI,regarding inflation control.

Why Target inflation?

Mohan Im still not clear. Why should Rajan only focus on inflation (CPI). Other things are also important like GDP, IIP, employment, investment, exchange rates. why focus on CPI only, and ignore everythingelse?

Urjit let me explain:

petrol and onion prices, hardship to middleclass= those are clichd points. Lets learn some new points.

In recent years, Indias inflation has been highest among all G20 countries.Indias inflation has been higher than its trade competitors.

CPI 2008 2012World 4 4Brazil 5 5China 6 10S.Africa 11 6Russia 14 5

From above table, you can see that

Between 2008 to 2012- China, South Africa and Russia have drastically reduced their inflation. Only Indiais the #EPICFAIL country where inflation has increased- instead of decreasing!Higher inflation = real interest rates decreased => makes people buy more gold=>CAD=>rupeeweaken=>petrol expensive=>everything expensive=>every more inflation =vicious cycle.

Mohan Whoa, whoa, whoa man slow down. What is real interest rate? How does it affect economy?

Nominal vs Real interest rate

Urjit Suppose Ive 100 rupees. But instead of buying onions, I put this money in a savings account.

Observe what happens with my purchasing power:

Onion Rs./kg Money How much can you Buy?1st Jan 20 100 5 kg31st Dec 100 104 ~1 kg

Meaning, although bank increased your money from Rs.100 to 104, but you can buy very less onions. Therefore,we must not focus on nominal interest rate i.e. 4% but on real interest rate.

Bank deposit Nominal Interest Rate CPI (Inflation) Real Rate of Interest=(Nominal-Inflation)Savings account 4.00% 11% -7%Fixed deposit 9.00% 11% -2%

From above table, you can see Banks in India offer negative real interest. Therefore, people prefer to invest ingold, instead of putting money in bank accounts.

Result:

Excessive gold import=>Current account deficit increased=>Rupee Weaken =>Petrol/dieselexpensive=>even more inflation. This becomes a vicious cycle where you cannot find whether hen camefirst or the egg came first?When people invest money in gold, instead of putting it in bank=> businessmen get less loans=>lessexpansion =>less jobs=> less growth in GDP.Now if you compare India vs [China, Russia, South Africa]. You can see- their inflation is low=> real interestrate would be higher => people invest less in gold=> more money flows towards banks=>businessloans=>higher GDP, higher IIP (index of industrial production).

Urjit In other words, when Rajan frames monetary policy, he should only fight against inflation then lowGDP, low IIP will be fixed automatically.

Mohan fair enough.

Nominal Anchor (CPI): the 4% TargetOk far weve learned:

When Rajan frames monetary policy

1. He must focus on fighting inflation only.2. To fight inflation, he must focus on CPI.

Now the problem? What should be his exact CPI target? 4%, 5%. 0%, -50%??

Mohan This is easy. Rajan should design monetary policy in such way, that CPI is -50%. If bottle of desiliquor was sold @100 Rs. in 2010, then in 2014 its price should reduce to Rs.50 only. Then Maujaa hiMaujaa.

Urjit I hate to break your spirit, but such deflationary trend is not good for economy.

Every business has fixed cost of production minimum light bill, phone bill, office rent, staff salary etc. So, ifprices keep falling and falling, then businessman will suffer losses. He has no motivation to expandbusiness. He wants to cut down his production costs, by firing some of the employees= less new jobscreated= unemployment = social unrest.If prices of everything fall- then custom duty, VAT, excise duty, service tax- their collection will alsodecrease. Then government has less money to spend on education, healthcare, social sector, defense,law and order = poverty, disease, crime.

Mohan Then what should be the minimum target? What should be the lower limit of inflation?Urjit Minimum 2% inflation is necessary in any economy.Mohan Then what should be the maximum limit for inflation/CPI?Urjit Ive analyzed data from various countries. When CPI gets higher than 6.2%, it negatively affects GDP

and employment. Therefore Rajan should ensure CPI inflation doesnt cross more than 6%.Mohan Ok, minimum 2% and maximum 6%.Urjit Right RBI should try to get CPI inflation @4% with band of +/-2%.

meaning 4-2=2% minimumand 4+2=6% maximum

Mohan But why give this 2% band? Why not just say 4% is our target?Urjit

Because in real life, it is not possible to get inflation controlled @exactly 4% level. There will beunanticipated price shocks in food and fuel items, wars, famines and natural disasters.Therefore, Rajan should be given some room to accommodate such shocks thats why 2-6%target.

Besides, the RBIs of other countries also use similar band method: observe

Central Bank of CPI target under their monetary policyMexico 2-4%South Africa 3-6%Israel 1-3%Chile 2-4%

So, its a tried and tested method. we should follow the same.

Nominal Anchor CPI 4%: WHEN to reach?

Mohan Ok so far Ive learned:Urjit Patel Committee wants to strengthen monetary policy frameworkYou insist RBI to fight inflation only.You even gave Rajan a target: 4% CPI (Combined), with +/-2% band

Urjit That is correct.Mohan well, Your recommendation is ambitious, but unrealistic. I repeat again- There are many factors

outside Rajans control like monsoon and black marketers. I dont think Rajan can ever bring downinflation to 4% level.

Urjit It is possible. Let me give you the case study of Chile.

During 90s, Chile was facing CPI inflation as high as 25%.But in the early 2000s, the RBI of Chile made the target 3% CPI (With +/-1% band)=2-4% CPINow observe the following graph- particularly the green band between 2002 to 2006. You can see ChilesRBI has successfully managed to contain inflation within that 2-4% level.

Urjit recommended following timeframe:

0 month (i.e.when Urjit wasmaking report)

CPI is ~10%

Within 12months

RBI should reduce CPI to8%

Within 24months

RBI should reduce CPI to6%

Then Just try to maintain inflationwithin the 2-6% range. (i.e.4% with +/-2% band)

In short: 0/12/24 (months)=>10/8/6 (CPI)

Nominal Anchor CPI 4%: How toreach?

Mohan Alright. If Chile can do it, we can alsodo it. But HOW?

UrjitUsing the same toolsavailable in the presentmonetary policy framework.Especially the policy rate.

Mohan What is policy rate?Urjit Repo rate under Liquidity adjustment

facility (LAF)= thats our policy rate.Urjit

And reverse repo(RR) = Repo minus 1%;MSF=Repo +plus 1%^This system is fine. Irecommend that Rajan shouldcontinue with it.RBI should not change this +/-1% spread between RR-Repo-MSF. (unless in extremesituation) becauseunpredictable policy making=not good for banking sectorsown business plans andtactical projections .

Hawkish trend: Why interest rates will rise?

Mohan Ok so far Ive learned:Urjit Patel Committee wants to strengthen monetary policy frameworkYou insist RBI to fight inflation only.You even gave Rajan a target: 4% CPI (Combined), with +/-2% bandYou even gave Rajan a timeframe: 0/12/24 (months)=>10/8/6 (CPI)You even gave Rajan the firing strategy: fight inflation via Policy rate (Repo Rate)

Urjit That is correct.Mohan But then whats the new story my friend? All these years, RBI has tried to fight inflation by using Repo

rate as its policy rate. But it has failed to yield any positive result. What makes you think repo ratecan fix our inflation problems?

Urjit Swami Vivekanand has said Aim higher. On the same logic, I recommend Repo Rate should bekept higher than CPI. Then itll fix the problem.

Observe.

At presentRepo 8%CPI ~10%Difference (Repo MINUS CPI) -2

You can see Repo rate is lower than CPI. Thats why its ineffective. In the previous article on monetary policy, welearned that

Monetary policy Tool How to Fight inflation? How to fight deflation?Repo rate Increase repo rate Decrease repo rate.

Therefore, to fight inflation repo rate MUST be increased. Urjit Patel recommends that Repo rate should beincreased so much that its higher than CPI.

Atpresent

Urjit Patels recommendation

Repo 8% Should be higher than CPI. Here CPI=10, so lets keep Repo@11%

CPI ~10% ~10Difference(Repo MINUSCPI)

-2 (11-10)=+1

In other words, Urjit Patel recommends that difference between Policy rate (Repo rate) and CPI should bepositive, Only then Policy rate can fight inflation.

What will be the consequences of high repo rate?

Banks borrow less from RBI (Because theyve to pay more interest rate)Banks will increase their loan interest rates (because theyve less new money and still want to keep profitmargin same)Less business expansion (because less people take loans, due to higher interest rate)Less new jobs createdLess incomeLess demandSellers will reduce Prices of goods and services, to attract and retain customers.= inflation reduced.

Mohan Wait wait wait. Urjit Patel, youre a hawkish person, a person who believes inflation can be foughtby increasing the interest rates.

Urjit So what?Mohan

So manRajan raises Repo rate=>SBI increases loan interest rates=>harder to borrow forbusinessmen=>less business expansion =>less new jobs=>deflationary trend=>this will hurtour GDP.CRISIL, Moody and other experts have made statistical projections- that even in 2015, our CPIwill be ~8.5%. So by your logic, Rajan should keep Repo @9%. It will kill the growth!

UrjitTheoretically youre right. High interest rates are not conductive for higher GDP growth.But Indian inflation has become so high, that extreme steps are necessary.Besides, the RBIs of Australia, Canada, S.Africa, Mexico, Brazil, Israel all have takensame measure in past.When inflation became very high, they raised repo rate to level higher than inflation. Only thenproblem was fixed.

Mohan Whatever man. Im going to write a column in TheH**** to criticize you that If Urjit Patel Committeesreport is implemented, interest rates will rise and growth will be killed. (Packs his laptop andPrepares to leave.)

Urjit WAIT! Picture abhi baaki hai mere dost. Overall I made three important recommendations. In thisarticle we only learned the first one:

1. @RBI fight inflation

1. Target=4% CPI, +/-2% Band [=control inflation in 2-6% range.]2. Tool=Repo as policy rate, +/-1% spread in RR-Repo-MSF,3. Time limit: 0/12/24 (months)=10/8/6% (CPI)4. Strategy=keep repo higher than CPI.

2. @Chindu, give cover fire to Rajan, while he is fighting inflation (=in next article click me)3. @Rajan fix accountability in your gang. (=in next article click me)

Mock Questions1. Incorrect statement

1. Nominal interest rate doesnt take inflation into account.2. Real interest rate doesnt take Nominal interest rate into account.3. Both A and B4. Neither A nor B

2. What do you understand by Real interest rate?

1. Nominal interest rate plus inflation2. Nominal interest rate minus inflation3. Nominal interest rate multiplied with inflation4. None of above.

3. In a futuristic society, if Real interest rate became a positive number, which of the following is mostlikely to be correct?

1. Fiscal deficit increased at the expense of current account deficit.2. People have started putting their entire savings into gold.3. RBI and Government failed in combating inflation.4. RBI and government successfully managed to bring down inflation below the nominal interest

offered in banks.

4. Urjit Patel Committee has observed that

1. CPI lower than 2% is good for economy but CPI higher than 6% is bad for economy2. CPI lower than 2% facilitates growth but CPI higher than 6% reduces employment.3. CPI lower than 2% and higher than 6%, are bad for GDP and employment.4. None of above.

5. Urjit Patel Committee has recommended that

1. RBI should continue with multiple indicator method to frame monetary policy, while targeting 4%inflation.

2. RBI should ignore fuel, food and service sector inflation and focus on core inflation only.3. RBI should frame monetary policy while keeping CPI as the nominal anchor.4. None of above.

6. Urjit Patel recommends RBI to:

1. Bring down consumer price index inflation to 6% within next twelve months.2. Switch its focus from multiple indicators to exchange rate stabilization3. both A and B4. Neither A nor B.

7. To Combat inflation, Urjit Patel Committee has recommended RBI to:

1. Keep Repo rate lower than CPI.2. Keep Reverse repo rate higher than MSF.3. Keep the value of Reverse repo rate between Repo rate and MSF.4. None of Above.

Q8. If RBI frames monetary policy with primary objective of stabilizing the exchange rate, what will be theconsequences?

1. Country becomes vulnerable to shocks emanating from the country to which its currency is pegged.2. Country becomes immune to speculative attacks in forex trading market.3. Imported inflation will be kept in check.

Choices

1. Only 1 and 22. Only 2 and 33. Only 1 and 3

4. All 1, 2 and 3.

Q9. What are the recommendations of Urjit Patel Committee?

1. Ination should be the nominal anchor for the monetary policy framework.2. RBI should adopt the new CPI (rural) as the measure of the nominal anchor for policy communication.3. WPI ination should be set at 4 per cent with a band of +/- 2

Answer choices

1. Only 1 and 22. Only 2 and 33. Only 1 and 34. Only 1

Q10. Match the following:

1. Hawk 1. Purchases securities under the assumption that they can be sold later at a higher price.

2. Bull 2. Believes that a particular stock or the market as a whole, is headed for a fall in prices.

3. Bear 3. Favors relatively high interest rates in order to keep inflation in check.

4. Favors relatively low interest rates in order to keep deflation in check.

Answer choices

Options I II IIIA 1 2 3B 4 1 2C 3 1 2D 3 2 1

Q11. Match following

1. Nachiket Mor 1. Nominal Anchor Method to frame Monetary Policy

2. Urjit Patel 2. Financial Sector Legislative Reforms

3. BN SriKrishna 3. Governance of Boards of Banks in India.

4. P. J. Nayak 4. Financial products for small businessmen.

5. State backwardness index

Answer choices

Options I II III IVA 5 1 2 3B 3 1 3 5C 4 1 2 5D 4 1 2 3

Mains / interview type questions, once we finish remaining recommendations of the committee in next article.

MCQ hints:

1. incorrect statement is B2. technical formula is bit different- but here opt B3. last one4. 6 both bad.5. second last6. neither7. none8. second statement is wrong.9. only first statement is right

10. hawk-interest, bull -will rise; bears-will fall11. Nachi- products, Urjit- Nominal, BN-reforms, Nayak-Board.

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[Economy] RBI Urjit Patel Committee: 4% CPI, Nominal Anchor, Multiple Indicator, Monetary Policy Framework Reforms (Part 1 of 2)PrologueUrjit Patel Committee: Basics

Monetary Policy: Where to focus?#1: Focus on Exchange rateAdvantages/Benefits of targeting Exchange rate?Disadvantages/limitations of targeting Exchange rate?#2: Focus on Multiple indicatorsMultiple indicator method: Negative points/ Limitations

#3: focus on inflationNominal anchor (CPI) method: Benefits/Advantages ofNominal anchor (CPI) method: Drawbacks/Limitations/Anti-arguments

Why Target inflation?Nominal vs Real interest rateNominal Anchor (CPI): the 4% TargetNominal Anchor CPI 4%: WHEN to reach?Nominal Anchor CPI 4%: How to reach?Hawkish trend: Why interest rates will rise?

Mock Questions | Previous Articles in this category