Explained - Urjit Patel Committee On Monetary Policy Reform

7/29/2014 Explained: Urjit Patel Committee on Monetary Policy Reform
http://mrunal.org/2014/02/economy-rbi-urjit-patel-committee-4-cpi-nominal-anchor-multiple-indicator-monetary-policy-framework-reforms-part-1-of-2.html 1/24
[Economy] RBI Urjit Patel Committee: 4% CPI, Nominal Anchor, Multiple Indicator, Monetary
Policy Framework Reforms (Part 1 of 2)
CSAT

1. Prologue
2. Monetary Policy reform: Where to
focus?
1. #1: Focus on Exchange rate
2. #2: Focus on Multiple indicators
3. #3: focus on inflation
1. Nominal anchor (CPI) method: Benefits/Advantages of
2. Nominal anchor (CPI) method: Drawbacks/Limitations/Anti-arguments
3. Why Target inflation?
1. Nominal vs Real interest rate
2. Nominal Anchor (CPI): the 4% Target
3. 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
Prologue
This 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 @Mumbai
Time: September 2013
Boss: Rajan has recently taken charge as the new governor of RBI. Immediately he setups
three Committees:

days
26

hrs
23

mi ns
10

sec.
10
1
What's New? ?
Chairman
Occupation
in RBI
Topic Result
Bimal
Jalan
Retire
Governor
New Bank
licenses
Work in progress.
Nachiket
Mor
Board
member
Financial
products/
Financial
inclusion
Published report in
January
2014.Discussed
in earlier articles.
Urjit Patel
Deputy
Governor
Monetary policy
framework: how
to strengthen it?
Published report in
Jan14. This is the
topic of our article.
Urjit Patel Committee: Basics
1. Formed by: RBI (and not finance ministry)
2. Official name: Expert Committee to Revise and Strengthen the Monetary Policy Framework
3. Chairman: Dr. Urjit Patel, Dy. Governor of RBI
4. 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 Shikha Sharma 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 increasing
employment, 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 Rate
2. 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 rate
If 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 for Rs.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. And tomorrow $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
accomplish and 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
cannot sustain 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
(= US Feds 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 vs Dollar (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 time controlling this mess.
5. Country becomes vulnerable to Speculative attacks. e.g. Forex traders in Europe or China
decide to hoard Apples (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 Rupee vs 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. But today, almost all banks in developed countries, have shifted to inflation targeting
strategy. Only few exceptions- like Singapores RBI use this strategy.
Moving to next method/strategy
#2: Focus on Multiple indicators
At 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 confidence
2. 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 employment
2. Increase GDP
3. Stabilize inflation
4. Stabilize exchange rate
Sounds fair enough? Not really!
Multiple indicator method: Negative points/ Limitations
1. 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. Therefore ineffective.
2. Multiple indicator strategy worked well between 1998 and 2008. GDP was good and inflation
was kept in check. But in recent times, this strategy is no longer working- inflation has
skyrocketed and GDP is falling day 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, call center etc.)
2. Service sector contributes more than 60% of GDP. So, when monetary policy is designed
without considering 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 and so on. Result?
1. RBI has to make new statistical calculation about each of such busines arenas- number of
people employed 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
twelve month). Why? We already learned the limitations of Monetary policy in a developing
country, the past article. Click me
7. Since this strategy doesnt have a clear cut transparent targets, it becomes vulnerable to
various pressure groups. For example
Pressure
group
informally forces Rajan to:
Chindu
Please increase SLR ratio. That way
government is able to sell more of its securities
to the banks and- arrange cash from more
schemes to increase employment- after all
thats what you want- increase employment!
Secondly, please increase the quota for women
under Priority sector lending because Rahul
baba has been advocating women
empowerment everywhere, including @Arnab
Goswamis interview.
Exporters/
IT
companies
Rajan Bhai, please tweak your monetary policy
in such way that $1=becomes 1000 rupees,
then we earn more rupees while exporting
goods n services abroad.
Importers
Please design your monetary policy in such way
that $1 = Rs.1. then weve to spend less rupees
while importing stuff from abroad.
FICCI
Please decrease Priority sector lending, CRR
and SLR that way more money is left for
business loans for corporate giants.
Bankers
Maai baap, please reduce PSL targets, SLR,
CRR and Repo, that way more money is left
with 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 inflation
In 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 of
1. 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 Rajan
2. 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 Chairman
2007 Mumbai as International Finance Center Percy Mistry
2009 Financial sector reform
Rajan the Boss
himself
2013
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 to control
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
over this.
Fuel/crude oil prices= depend on external factors
and Rupee-Dollar exchange rate. Rajan doesnt
have sufficient forex reserves to control rupee-dollar
exchange rate in the manner he wants (e.g. 1$=50
rupees and not 1$=60 Rs.)
Urjit
Youre right. But under multiple indicator method,
Rajan focuses on WPI (minus food and fuel
inflation).
Thats why his policy has remained ineffective in
controlling inflation.Because he always ignored food
and fuel inflation.
Infact, We must focus on CPI for the very same
reason-because it give >50% weightage to the food
and fuel inflation.
Mohan
Point taken. But in India, we have three CPIs: Urban,
Rural and Combinedif we try to control all three of
them, then..
Urjit
No problem. We must focus only on CPI (Combined). Its
data is released @every 12 days. Very easy to 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 the RBI!
Mohan
But even if Rajan focuses on this Nominal Anchor (CPI),
still there will be a lag of 6-8 months before its impacts
are seen.
Urjit
Brother, no matter which method we use there will be
lag of 6-8 months before its impact is seen on inflation
@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, start importing 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 become wrong 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 everything else?
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 2012
World 4 4
Brazil 5 5
China 6 <3
India 9 >10
S.Africa 11 6
Russia 14 5
From above table, you can see that
Between 2008 to 2012- China, South Africa and Russia have drastically reduced their inflation.
Only India is the #EPICFAIL country where inflation has increased- instead of decreasing!
Higher inflation = real interest rates decreased => makes people buy more gold=>CAD=>rupee
weaken=>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 kg
31st 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 in gold, instead of putting money in bank accounts.
Result:
Excessive gold import=>Current account deficit increased=>Rupee Weaken =>Petrol/diesel
expensive=>even more inflation. This becomes a vicious cycle where you cannot find whether
hen came first or the egg came first?
When people invest money in gold, instead of putting it in bank=> businessmen get less
loans=>less expansion =>less jobs=> less growth in GDP.
Now if you compare India vs [China, Russia, South Africa]. You can see- their inflation is low=>
real interest rate would be higher => people invest less in gold=> more money flows towards
banks=>business loans=>higher GDP, higher IIP (index of industrial production).
Urjit
In other words, when Rajan frames monetary policy, he
should only fight against inflation then low GDP, low IIP
will be fixed automatically.
Mohan fair enough.
Nominal Anchor (CPI): the 4% Target
Ok 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 desi liquor was
sold @100 Rs. in 2010, then in 2014 its price should
reduce to Rs.50 only. Then Maujaa hi Maujaa.
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, if prices keep falling and falling, then businessman will suffer losses. He has no
motivation to expand business. He wants to cut down his production costs, by firing some of
the employees= less new jobs created= unemployment = social unrest.
If prices of everything fall- then custom duty, VAT, excise duty, service tax- their collection will
also decrease. 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% minimum
and 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 be
unanticipated 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 policy
Mexico 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 framework
You 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 down inflation 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% CPI
Now observe the following graph- particularly the green band between 2002 to 2006. You can
see Chiles RBI has successfully managed to contain inflation within that 2-4% level.
Urjit recommended following timeframe:
0 month (i.e. when Urjit
was making report)
CPI is ~10%
Within 12 months RBI should reduce CPI to 8%
Within 24 months RBI should reduce CPI to 6%
Then
Just try to maintain inflation within 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 to reach?
Mohan Alright. If Chile can do it, we can also do it. But HOW?
Urjit
Using the same tools available in the present
monetary 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. I recommend that Rajan should
continue with it.
RBI should not change this +/- 1% spread between
RR-Repo-MSF. (unless in extreme situation)
because unpredictable policy making= not good for
banking sectors own business plans and tactical
projections .
Hawkish trend: Why interest rates will rise?
Mohan
Ok so far Ive learned:
Urjit Patel Committee wants to strengthen monetary
policy framework
You insist RBI to fight inflation only.
You even gave Rajan a target: 4% CPI (Combined),
with +/-2% band
You 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.
But then whats the new story my friend? All these years,
RBI has tried to fight inflation by using Repo rate as its
Mohan policy rate. But it has failed to yield any positive result.
What makes you think repo rate can fix our inflation
problems?
Urjit
Swami Vivekanand has said Aim higher. On the same
logic, I recommend Repo Rate should be kept higher
than CPI. Then itll fix the problem.
Observe.
At present
Repo 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, we learned 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 be increased so much that its higher than CPI.
At
present
Urjit Patels recommendation
Repo 8%
Should be higher than CPI. Here
CPI=10, so lets keep Repo @11%
CPI ~10% ~10
Difference(Repo
MINUS CPI)
-2 (11-10)=+1
In other words, Urjit Patel recommends that difference between Policy rate (Repo rate) and CPI
should be positive, 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 profit margin same)
Less business expansion (because less people take loans, due to higher interest rate)
Less new jobs created
Less income
Less demand
Sellers 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 fought by
increasing the interest rates.
Urjit So what?
Mohan
So manRajan raises Repo rate=>SBI increases
loan interest rates=>harder to borrow for
businessmen=>less business expansion =>less
new jobs=>deflationary trend=>this will hurt our
GDP.
CRISIL, Moody and other experts have made
statistical projections- that even in 2015, our CPI will
be ~8.5%. So by your logic, Rajan should keep
Repo @9%. It will kill the growth!
Urjit
Theoretically 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 taken same
measure in past.
When inflation became very high, they raised repo
rate to level higher than inflation. Only then problem
was fixed.
Mohan
Whatever man. Im going to write a column in TheH**** to
criticize you that If Urjit Patel Committees report is
implemented, interest rates will rise and growth will be
killed. (Packs his laptop and Prepares to leave.)
Urjit
WAIT! Picture abhi baaki hai mere dost. Overall I made
three important recommendations. In this article 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 Questions
1. 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 B
4. Neither A nor B
2. What do you understand by Real interest rate?
1. Nominal interest rate plus inflation
2. Nominal interest rate minus inflation
3. Nominal interest rate multiplied with inflation
4. None of above.
3. In a futuristic society, if Real interest rate became a positive number, which of the following is
most likely 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 economy
2. 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 stabilization
3. both A and B
4. 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 the consequences?
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 2
2. Only 2 and 3
3. 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 2
2. Only 2 and 3
3. Only 1 and 3
4. 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 III
A 1 2 3
B 4 1 2
C 3 1 2
D 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 IV
A 5 1 2 3
B 3 1 3 5
C 4 1 2 5
D 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 B
2. technical formula is bit different- but here opt B
3. last one
4. <2 and >6 both bad.
5. second last
6. neither
7. none
8. second statement is wrong.
9. only first statement is right
10. hawk-interest, bull -will rise; bears-will fall
11. Nachi- products, Urjit- Nominal, BN-reforms, Nayak-Board.
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Explained - Urjit Patel Committee On Monetary Policy Reform

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7/29/2014 Explained: Urjit Patel Committee on Monetary Policy Reform

4. Favors relatively low interest rates in order to

5. State backwardness index

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