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The Urjit Patel Committee report to revise and strengthen the monetary policy framework suggests some sweeping changes to overhaul the existing operating structures including a shift to CPI as the nominal anchor for inflation and moving to a model followed by the Federal Reserve to set up a monetary policy committee headed by the governor to vote on rate decisions. It also lays out a prescriptive roadmap to bring down inflation and makes recommendations for the government to reduce its fiscal deficit.
Here's how experts are reacting to the key proposals in the report -
FIRST TAKE
Shubhada Rao, Chief Economist & Senior President - Yes Bank
The report has done much that was needed for the formalization of monetary policy conduct, prompting the government to adhere to strict fiscal discipline on administered prices, wages and budget deficits and recommended ideas to take monetary policy away from fiscal dominance.
Ashvin Parekh, Partner, National Leader - Financial Services - Ernst & Young
This report brings a more formalized model based approach to inflation management through monetary policy. Quite clearly, the regulator is making inflation targeting and not growth the prime responsibility of monetary policy.
ON SHIFT TO CPI AS NOMINAL ANCHOR FOR INFLATION
Shubhada Rao, Chief Economist & Senior President - Yes Bank
I think this was a much needed shift. An economy can ill afford elevated inflation for 3-4 years and more importantly let inflation expectations become entrenched affecting long term growth sustainability.
Ashvin Parekh, Partner, National Leader - Financial Services - Ernst & Young
CPI is a very good benchmark and the reason for that is - 3 or 4 major decisions in the economy are derived out of CPI including the wage bill compensation models used by the central government and the entire households savings structure.
ROADMAP TO INFLATION TARGETTING TOO PRESCRIPTIVE AND AMBITIOUS?
Shubhada Rao, Chief Economist & Senior President - Yes Bank
We need rule based automation to set the current anomalies right and those rules have been laid out by the committee. You have to start somewhere, we cannot afford to wait for everything to fall into place before adopting the new policy framework. We are in an election year and I would think/hope the new government will take these recommendations on board.
Ashvin Parekh, Partner, National Leader - Financial Services - Ernst & Young
I get an impression that the panel is suggesting a more objective view to design monetary policy, ruling out any subjectivity and arbitrariness arising out of the duel objectives of managing growth and inflation. I see this as a very good firewall, so even if the government were to play a role in monetary policy recognition which is what the FSLRC rules had suggested, this could be an excellent rule based approach to put new structures in place.
ON THE MONETARY POLICY COMMITTEE (MPC) FRAMEWORK TO SET RATES
Shubhada Rao, Chief Economist & Senior President - Yes Bank
This presumably would need an RBI act amendment. Some of these stiff recommendations may even be prone to dilution but they are necessary elements for independence of monetary policy. We need to ensure though there aren't many caveats that come in way of implementing this.
Ashvin Parekh, Partner, National Leader - Financial Services - Ernst & Young
To my mind, a committee takes away discretionary flexibility out of policy design and brings in a rules based approach sanitizing the monetary policy debate through data. But India is a very complex economy and in order to bring in more flexibility to the rules I would like to see more fresh data based models emerging as these rules establish themselves.
Shubhada Rao, Chief Economist & Senior President - Yes Bank
Keeping in mind the roadmap that's been laid out for CPI of 8% in the next 12 months and 6% subsequently in the next two years we do not expect a hike in this policy. There could be a prolonged pause. The CPI trajectory is improving, and January data could be better than December data. We are also seeing stabilization with disinflationary forces on the non-food and non-fuel side of inflation, so a pause is what we will build in at the moment.
Samiran Chakrabarty, Regional Head of Research - Standard Chartered Bank (As told to CNBC TV18)
This will form the backbone of how RBI will be thinking about monetary policy from now on. Whether that's made explicit or not is a different question. In my view RBI will be able to put out for public consumption things like what is the comfort level on inflation, whether they like the current level of inflation or not, reduce the importance of Wholesale Price Index (WPI) in the discussions. So those chances can happen quite quickly.
