Urjit patel rbi

2/3/2014

[Economy] RBI Urjit Patel Committee: 4% CPI, Nominal Anchor, Multiple Indicator, Monetary Policy Framework Reforms (Part 1 of 2) « Mrunal

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FEBRUARY 2ND, 2014

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[Economy] RBI Urjit Patel Committee: 4% CPI, Nominal Anchor, Multiple Indicator, Monetary Policy
Framework Reforms (Part 1 of 2)
Prologue
Monetary Policy: Where to focus?
#1: Focus on Exchange rate
#2: Focus on Multiple indicators
#3: focus on inflation
Nominal anchor (CPI) method: Benefits/Advantages of
Nominal anchor (CPI) method: Drawbacks/Limitations/Anti-arguments
Why Target inflation?
Nominal vs Real interest rate
Nominal Anchor (CPI): the 4% Target
Nominal Anchor CPI 4%: WHEN to reach?
Nominal Anchor CPI 4%: How to reach?
Hawkish trend: Why interest rates will rise?
Mock Questions

Prologue
This article won’t make much sense, unless you’re thorough with the concepts of monetary policy: its functions, tools and limitation.
So make sure you’ve read the previous article. click me.
Place: RBI’s Main Adda @Mumbai
Time: September 2013
Boss: Rajan has recently taken charge as the new governor of RBI. Immediately he setups three Committees:

Chairman

Occupation in
RBI

Bimal Jalan Retire Governor

Topic

Result

New Bank licenses

Work in progress.
Published report in January 2014.

Nachiket
Mor

Board member

Financial products/ Financial inclusion

Urjit Patel

Deputy Governor

Monetary policy framework: how to
strengthen it?

Discussed in earlier articles.
Published report in Jan’14. 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
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?…

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3. Chairman: Dr. Urjit Patel, Dy. Governor of RBI
4. Eight Members: economics professors, finance experts etc. They’re 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 Patel’s 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.]
Let’s start with first recommendation.
Urjit

My first recommendation is that RBI must target inflation only. Nothing else- don’t focus on increasing employment, don’t
focus on increasing growth, don’t 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?


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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)
Let’s 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 he’ll 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. That’ll 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 Doesn’t 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 Rajan’s statistical projections will go wrong. He’ll 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

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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 Singapore’s 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.
2.
3.
4.

Increase employment
Increase GDP
Stabilize inflation
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 doesn’t focus on CPI. They only focus on WPI (minus food and fuel). Result?
a. WPI doesn’t track changes in the service sector related inflation (e.g. doctor, physiotherapist, IT, call center etc.)
b. Service sector contributes more than 60% of GDP. So, when monetary policy is designed without considering service
sector inflation=then it’ll be ineffective.
5. WPI commodity list has been revised in recent times- they added ice cream, oven, cricket ball, guitar and so on. Result?
a. 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.
b. But when WPI commodity list is revised, RBI has to calculate new statistical projections= problem. Policy doesn’t 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 doesn’t 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 that’s 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 Goswami’s 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 we’ve 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.


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Therefore, Urjit recommends Rajan to dump this multiple indicator method.
Ok boss. So far I’ve learned following:

Mohan

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 he’ll 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 Rajan’s 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 RBI’s policy is and whether it’s 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. You’re trying to paint a very rosy picture. But if Rajan’s monetary policy tries to control CPI, it’ll have
many problems!

Urjit

Such as…??
In CPI index- more than 50% weightage is given to food and fuel components.

Mohan

Urjit

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 doesn’t 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.)
You’re right. But under multiple indicator method, Rajan focuses on WPI (minus food and fuel inflation).
That’s 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 Combined…if 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 India’s 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.
Brother, no matter which method we use – there will be lag of 6-8 months before its impact is seen on inflation @ground
level.
Urjit

Because we are not a developed country, we are a developing country.
We’ve already learned this limitation of monetary policy in developing countries. Click me.

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
Mohan
distributing them @subsidized rates in various cities.


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Urjit

So?

So Rajan may be designed his policy to fight CPI using abc statistical projections but at random, the government will do
Mohan xyz policy on its own to fight inflation= Rajan’s 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

I’m 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 clichéd points. Let’s learn some new points.
In recent years, India’s inflation has been highest among all G20 countries.
India’s 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

14

5

Russia

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 I’ve 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

31st Dec 100

100

5 kg

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)


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Savings account 4.00%

11%

-7%

9.00%

11%

-2%

Fixed deposit

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 we’ve 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

I’ve analyzed data from various countries. When CPI gets higher than 6.2%, it negatively affects GDP and employment.
Therefore Rajan should ensure CPI inflation doesn’t cross more than 6%.

Mohan Ok, minimum 2% and maximum 6%.
Right RBI should try to get CPI inflation @4% with band of +/-2%.
Urjit

meaning 4-2=2% minimum
and 4+2=6% maximum


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Mohan But why give this 2% band? Why not just say 4% is our target?
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 – that’s why 2-6% target.

Urjit

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, it’s a tried and tested method. we should follow the same.
Nominal Anchor CPI 4%: WHEN to reach?
Ok so far I’ve learned:
Mohan

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 Rajan’s control like
monsoon and black marketers. I don’t 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 Chile’s RBI has successfully
managed to contain inflation within that 2-4% level.
Urjit recommended following timeframe:


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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

Urjit

Repo rate under Liquidity adjustment facility (LAF)= that’s our policy rate.
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 sector’s own business plans and tactical projections .

Hawkish trend: Why interest rates will rise?
Ok so far I’ve learned:

Mohan

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.

Mohan

But then what’s the new story my friend? All these years, RBI has tried to fight inflation by using Repo rate as its “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 it’ll fix the problem.

Observe.

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At present
Repo

8%

CPI

~10%

Difference (Repo MINUS CPI) -2
You can see Repo rate is lower than CPI. That’s 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 Patel’s recommendation
Repo

8%

Should be higher than CPI. Here CPI=10, so let’s keep Repo @11%

CPI

~10%

~10

-2

(11-10)=+1

Difference
(Repo MINUS CPI)

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 they’ve to pay more interest rate)
Banks will increase their loan interest rates (because they’ve 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, you’re a “hawkish” person, a person who believes inflation can be fought by increasing the
interest rates.

Urjit

So what?

Mohan

So man…Rajan 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 you’re 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. I’m going to write a column in TheH**** to criticize you that “If Urjit Patel Committee’s 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
a. Target=4% CPI, +/-2% Band [=control inflation in 2-6% range.]
b. Tool=Repo as policy rate, +/-1% spread in RR-Repo-MSF,
c. Time limit: 0/12/24 (months)=10/8/6% (CPI)
d. Strategy=keep repo higher than CPI.
2. @Chindu, give cover fire to Rajan, while he is fighting inflation (=in next article)
3. @Rajan fix accountability in your gang. (=in next article)

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…

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Mock Questions
1. Incorrect statement
a. Nominal interest rate doesn’t take inflation into account.
b. Real interest rate doesn’t take Nominal interest rate into account.
c. Both A and B
d. Neither A nor B
2. What do you understand by Real interest rate?
a. Nominal interest rate plus inflation
b. Nominal interest rate minus inflation
c. Nominal interest rate multiplied with inflation
d. 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?
a. Fiscal deficit increased at the expense of current account deficit.
b. People have started putting their entire savings into gold.
c. RBI and Government failed in combating inflation.
d. RBI and government successfully managed to bring down inflation below the nominal interest offered in banks.
4. Urjit Patel Committee has observed that
a. CPI lower than 2% is good for economy but CPI higher than 6% is bad for economy
b. CPI lower than 2% facilitates growth but CPI higher than 6% reduces employment.
c. CPI lower than 2% and higher than 6%, are bad for GDP and employment.
d. None of above.
5. Urjit Patel Committee has recommended that
a. RBI should continue with multiple indicator method to frame monetary policy, while targeting 4% inflation.
b. RBI should ignore fuel, food and service sector inflation and focus on core inflation only.
c. RBI should frame monetary policy while keeping CPI as the nominal anchor.
d. None of above.
6. Urjit Patel recommends RBI to:
a. Bring down consumer price index inflation to 6% within next twelve months.
b. Switch its focus from multiple indicators to exchange rate stabilization
c. both A and B
d. Neither A nor B.
7. To Combat inflation, Urjit Patel Committee has recommended RBI to:
a. Keep Repo rate lower than CPI.
b. Keep Reverse repo rate higher than MSF.
c. Keep the value of Reverse repo rate between Repo rate and MSF.
d. 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.

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Choices
a.
b.
c.
d.

Only 1 and 2
Only 2 and 3
Only 1 and 3
All 1, 2 and 3.

Q9. What are the recommendations of Urjit Patel Committee?
1. Inﬂation 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 inﬂation should be set at 4 per cent with a band of +/- 2
Answer choices
a.
b.
c.
d.

Only 1 and 2
Only 2 and 3
Only 1 and 3
Only 1

Q10. Match the following:
1. Purchases securities under the assumption that they can be sold later at a higher price.

I. Hawk

2. Believes that a particular stock or the market as a whole, is headed for a fall in prices.

II. Bull

3. Favors relatively high interest rates in order to keep inflation in check.

III. Bear
–

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. Nominal Anchor Method to frame Monetary Policy

I. Nachiket Mor

2. Financial Sector Legislative Reforms

II. Urjit Patel
III. BN SriKrishna

3. Governance of Boards of Banks in India.

IV. 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

12/14

2/3/2014

2.
3.
4.
5.
6.
7.
8.
9.
10.
11.


technical formula is bit different- but here opt B
last one
<2 and >6 both bad.
second last
neither
none
second statement is wrong.
only first statement is right
hawk-interest, bull -will rise; bears-will fall
Nachi- products, Urjit- Nominal, BN-reforms, Nayak-Board.

Visit Mrunal.org/Economy For more on Money, Banking, Finance, Taxation and Economy.
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16 comments to [Economy] RBI Urjit Patel Committee: 4% CPI, Nominal Anchor, Multiple Indicator,
Monetary Policy Framework Reforms (Part 1 of 2)

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preeti rai
Reply to this comment
thankkkkk uuuuuuu so much sir

Aman
I have a Question
Kis chakki ka Aanta khate ho bhai ?

ANKIT
you are superb in economics! brillient…….

somit
Sir ji,
You should be in the Urjit Patel committee!! Brilliant !!Thanks a ton!!

vipin kumar chopra
Nice article!! Simple as easy to understand and that too in a funny way !!


13/14

2/3/2014


dallu
jai ho “MRUNAL BABA”

Gaurav
Amazing article. Mrunal Sir, you make things so easy to understand. Thanks a lot.

Chester
Hello Mrunal Sir….
Plzz can you let us know the GS and any general topics you are going to touch in coming 1-2 months, atleast if you have any plan in this,
can you share with us, If you let us know we can schedule our preparation well, cozzz your approach provides a GATEWAY for us to study
the topics in depth for eg: your topics of Land Reforms, Food Processing, Geographical factors. I hope you will let us know soon.
& one more thing
Sir we are waiting for final article of [Land Reforms] :forest rights act, draft national policy and few other misc topics & [Geography] Location
Factors : 6th and 7th Articles……
Thanks in advance

Suman Shekhar
Superb Article !
So easy to understand and memorize..
Waiting for the next parts.

Satya Brat
thanks!!!

PTA27
Mrunal Sir, In your previous article you had mentioned qualitative tools are better when compared to quantitative tools, you had nice pictorial
representation of the facts. But how come again policy rate will become a effective tool in controlling inflation, kindly clarify. Thank you.

priya singh
thanks sir….i was trying to understand this issue….today u clear my doubts…thanks a lot

Rohin kotwal
speechless Mrunal sir :)

Santosh
Grt fan of urs :) Ur wonderful creation of god :P

Dheeraj
One word…
Awesome…

khushboo
Sir, how many nationalised banks r there is it 19 or 21?
SBI is nationalised or PSU.
nd IDBI also?


14/14

Urjit patel rbi

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