ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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A New Road Map for Monetary Policy

Flawed Cartography?

The Urjit Patel Committee has come out in favour of the Reserve Bank of India moving towards a flexible infl ation targeting system. This approach to monetary policy is a product of the much-criticised "new consensus macroeconomics", a school of thought that is credited with causing the recent global fi nancial crisis. The objectives for monetary policy that the committee suggests are not only theoretically unwarranted, but also unjustifi ed for the current state of evolution of India's financial system.

Coming immediately in the wake of the prime minister’s remarks1 at the release of the fourth volume of the Reserve Bank of India’s (RBI) history (17 August 2013), exhorting the RBI (under the high-profile current governor) to revisit the conduct of monetary policy, the appointment of an expert committee, the Urjit Patel Committee (UPC), with this precise mandate, generated a great deal of excitement. Predictably, the much-awaited report (released in January 2014) struck a rather flamboyant note, making several far-reaching suggestions, with long-term import.

While the recommendations (listed in Chapter VI of the report) number well over 40, I will restrict myself only to a few important ones, namely: (i) the general macroeconomic approach of the report, (ii) the adoption of flexible inflation targeting (FIT) as the explicit monetary policy objective, (iii) the choice of the inflation metric, (iv) choice of target rate of inflation, and (v) other miscellaneous issues.

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