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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%.
Nominal Anchor CPI: What target?
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%
Nominal Anchor CPI: What target?
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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Urjit Patel Committee
Expert Committee to Revise and Strengthen the Monetary PFramework
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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Urjit Patel Committee
Expert Committee to Revise and Strengthen the Monetary PFramework
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?