 "Rupa Rege Nitsure")
The major recommendation of this report is migration to a rule-based framework to make monetary policy-making more predictable and reduce uncertainties in business planning. As monetary policy, to a great extent, deals with management of inflation expectations, the choice of the new Consumer Price Index (combined) as the measure of the nominal anchor makes perfect sense. However, given the current weaknesses in economic activity and supply constraints, a transition path is recommended before the ultimate target of inflation at four per cent (give or take two per cent) is achieved in two years.
To improve credibility and transparency in policy-setting, a committee-based approach, similar to that in the US and the UK, is recommended, with published minutes and voting records. The suggested operating framework will focus on the development of the term repo market/yield curve, so as to reduce, albeit in a gradual fashion, the dependence of banks on RBI for their short-term cash management. The report has duly considered the imperatives of fiscal discipline and the Basel-III framework and recommended a roadmap for Statutory Liquidity Ratio reduction consistent with the path of fiscal consolidation (fiscal deficit to fall to three per cent of gross domestic product by FY17) and the requirements of the liquidity coverage ratio.
The success of the new framework critically depends on the government's dedicated commitment to fiscal consolidation and structural reforms.
The author is chief economist, Bank of Baroda, and a member of the Urjit Patel committee
