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[Economy] RBI Urjit Patel Committee: 4% CPI, Nominal Anchor, Multiple Indicator, Monetary PolicyFramework 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 @MumbaiTime: September 2013Boss: Rajan has recently taken charge as the new governor of RBI. Immediately he setups three Committees:

ChairmanOccupation inRBI

Topic Result

Bimal Jalan Retire Governor New Bank licenses Work in progress.

NachiketMor

Board member Financial products/ Financial inclusion

Published report in January 2014.

Discussed in earlier articles.

Urjit Patel Deputy GovernorMonetary policy framework: how tostrengthen it?

Published report in Jan’14. This is the topic of ourarticle.

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

HOME ECONOMY FEBRUARY 2ND, 2014 16 COMMENTS

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3. Chairman: Dr. Urjit Patel, Dy. Governor of RBI4. 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 wasleft 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.

UrjitMy first recommendation is that RBI must target inflation only. Nothing else- don’t focus on increasing employment, don’tfocus on increasing growth, don’t focus on stabilizing rupee-dollar exchange rate. Just focus on one thing and one thingonly- 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 Rate2. 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 supplyis 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 downprices 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 forbusiness decisions.)

4. Clarity. Transparency in Decision Making. Aam Juntaa can understand what RBI is trying to accomplish and whether Rajan issucceeding 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 focuson 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 importedfood. We must be self-reliant in food production.

3. Country becomes vulnerable to external shocks. Continuing the previous example of Apple vs Rupee1. 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 rupeevs 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) intheir 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 banksin 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 confidence2. Professional forecasts (CRISIL, S&P, Moody, World Bank) about GDP, inflation, unemployment3. Inflation data: WPI minus food, fuel.

Then, he will design the monetary policy (mainly repo rate), with following objectives/focuses:

1. Increase employment2. Increase GDP3. Stabilize inflation4. 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 WPIby 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 recenttimes, 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 bankloans 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 giveeffective 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 alreadylearned 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

Pressuregroup

informally forces Rajan to:

Chindu

Please increase SLR ratio. That way government is able to sell more of its securities to the banks and- arrangecash 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 beenadvocating “women empowerment” everywhere, including @Arnab Goswami’s interview.

Exporters/ITcompanies

Rajan Bhai, please tweak your monetary policy in such way that $1=becomes 1000 rupees, then we earn morerupees while exporting goods n services abroad.

ImportersPlease design your monetary policy in such way that $1 = Rs.1. then we’ve to spend less rupees whileimporting stuff from abroad.

FICCIPlease decrease Priority sector lending, CRR and SLR that way more money is left for business loans forcorporate giants.

BankersMaai baap, please reduce PSL targets, SLR, CRR and Repo, that way more money is left with us, and we canlend it to middle class and businessmen.

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Therefore, Urjit recommends Rajan to dump this multiple indicator method.

Mohan

Ok boss. So far I’ve 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 he’ll fix an inflation-target say 2-6% andadjust 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

MohanHold on a second. You’re trying to paint a very rosy picture. But if Rajan’s monetary policy tries to control CPI, it’ll havemany 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 doesn’t have sufficientforex reserves to control rupee-dollar exchange rate in the manner he wants (e.g. 1$=50 rupees and not 1$=60 Rs.)

Urjit

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 fuelinflation.Infact, We must focus on CPI – for the very same reason-because it give >50% weightage to the food and fuelinflation.

Mohan Point taken. But in India, we have three CPIs: Urban, Rural and Combined…if we try to control all three of them, then…..

UrjitNo problem. We must focus only on CPI (Combined). Its data is released @every 12 days. Very easy to monitor, tracksprice movement all over India.

Mohan Ya but still, Its data is not accurate and….

Urjityaar if you start to find fault in everything (like a TheH**** columnist), ….then only God can help you. Fidel Castro andChe 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.

Urjit

Brother, no matter which method we use – there will be lag of 6-8 months before its impact is seen on inflation @groundlevel.

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.

Mohan

Ok one last obstacle. Governments own policy to fight CPI. For example, whenever prices of sugar, onion or pulses getvery high, the government arbitrarily puts export ban on those commodities, start importing them from xyz country, startsdistributing them @subsidized rates in various cities.

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Urjit So?

MohanSo Rajan may be designed his policy to fight CPI using abc statistical projections but at random, the government will doxyz policy on its own to fight inflation= Rajan’s statistical projections will become wrong and his monetary policy willbecome #EPIFAIL.

UrjitFor this I recommend better coordination and data sharing between Government of India and RBI, regarding inflationcontrol.

Why Target inflation?

MohanI’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

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 #EPICFAILcountry where inflation has increased- instead of decreasing!Higher inflation = real interest rates decreased => makes people buy more gold=>CAD=>rupee weaken=>petrolexpensive=>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 20 100 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 focuson 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%

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 ofputting 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 behigher => people invest less in gold=> more money flows towards banks=>business loans=>higher GDP, higher IIP (index ofindustrial production).

UrjitIn other words, when Rajan frames monetary policy, he should only fight against inflation – then low GDP, low IIP will befixed 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%??

MohanThis is easy. Rajan should design monetary policy in such way, that CPI is -50%. If bottle of desi liquor was sold @100Rs. 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 fallingand falling, then businessman will suffer losses. He has no motivation to expand business. He wants to cut down his productioncosts, 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 governmenthas 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?

UrjitI’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%.

Urjit

Right RBI should try to get CPI inflation @4% with band of +/-2%.

meaning 4-2=2% minimumand 4+2=6% maximum

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Mohan But why give this 2% band? Why not just say 4% is our target?

UrjitBecause in real life, it is not possible to get inflation controlled @exactly 4% level. There will be unanticipated priceshocks 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.

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?

Mohan

Ok so far I’ve learned:

Urjit Patel Committee wants to strengthen monetary policy frameworkYou insist RBI to fight inflation only.You even gave Rajan a target: 4% CPI (Combined), with +/-2% band

Urjit That is correct.

Mohanwell, Your recommendation is ambitious, but unrealistic. I repeat again- There are many factors outside Rajan’s control likemonsoon 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% CPINow observe the following graph- particularly the green band between 2002 to 2006. You can see Chile’s RBI has successfullymanaged 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?

UrjitUsing 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)= that’s 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) becauseunpredictable policy making= not good for banking sector’s own business plans and tactical projections .

Hawkish trend: Why interest rates will rise?

Mohan

Ok so far I’ve learned:

Urjit Patel Committee wants to strengthen monetary policy frameworkYou insist RBI to fight inflation only.You even gave Rajan a target: 4% CPI (Combined), with +/-2% bandYou 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.

MohanBut then what’s the new story my friend? All these years, RBI has tried to fight inflation by using Repo rate as its “policyrate”. But it has failed to yield any positive result. What makes you think repo rate can fix our inflation problems?

UrjitSwami 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 itshigher 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

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 Policyrate 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 createdLess incomeLess demandSellers will reduce Prices of goods and services, to attract and retain customers.= inflation reduced.

MohanWait wait wait. Urjit Patel, you’re a “hawkish” person, a person who believes inflation can be fought by increasing theinterest rates.

Urjit So what?

Mohan

So man…Rajan raises Repo rate=>SBI increases loan interest rates=>harder to borrow for businessmen=>lessbusiness 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 byyour 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.

MohanWhatever man. I’m going to write a column in TheH**** to criticize you that “If Urjit Patel Committee’s report isimplemented, interest rates will rise and growth will be killed.” (Packs his laptop and Prepares to leave.)

UrjitWAIT! Picture abhi baaki hai mere dost. Overall I made three important recommendations. In this article we only learnedthe first one:

1. @RBI fight inflationa. 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)

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Mock Questions

1. Incorrect statementa. 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 Bd. Neither A nor B

2. What do you understand by Real interest rate?a. Nominal interest rate plus inflationb. Nominal interest rate minus inflationc. Nominal interest rate multiplied with inflationd. None of above.

3. In a futuristic society, if Real interest rate became a positive number, which of the following is most likely to becorrect?

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 thata. CPI lower than 2% is good for economy but CPI higher than 6% is bad for economyb. 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 thata. 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 stabilizationc. both A and Bd. 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.

2/3/2014 [Economy] RBI Urjit Patel Committee: 4% CPI, Nominal Anchor, Multiple Indicator, Monetary Policy Framework Reforms (Part 1 of 2) « Mrunal

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… 12/14

Choices

a. Only 1 and 2b. Only 2 and 3c. Only 1 and 3d. 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. Only 1 and 2b. Only 2 and 3c. Only 1 and 3d. Only 1

Q10. Match the following:

I. Hawk 1. Purchases securities under the assumption that they can be sold later at a higher price.

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

III. 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

I. Nachiket Mor 1. Nominal Anchor Method to frame Monetary Policy

II. Urjit Patel 2. Financial Sector Legislative Reforms

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

2/3/2014 [Economy] RBI Urjit Patel Committee: 4% CPI, Nominal Anchor, Multiple Indicator, Monetary Policy Framework Reforms (Part 1 of 2) « Mrunal

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… 13/14

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2. technical formula is bit different- but here opt B3. last one4. <2 and >6 both bad.5. second last6. neither7. none8. second statement is wrong.9. only first statement is right

10. hawk-interest, bull -will rise; bears-will fall11. 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)

preeti raiReply to this comment

thankkkkk uuuuuuu so much sir

AmanReply to this comment

I have a Question

Kis chakki ka Aanta khate ho bhai ?

ANKITReply to this comment

you are superb in economics! brillient…….

somitReply to this comment

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

vipin kumar chopraReply to this comment

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

2/3/2014 [Economy] RBI Urjit Patel Committee: 4% CPI, Nominal Anchor, Multiple Indicator, Monetary Policy Framework Reforms (Part 1 of 2) « Mrunal

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… 14/14

dalluReply to this comment

jai ho “MRUNAL BABA”

GauravReply to this comment

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

ChesterReply to this comment

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 studythe topics in depth for eg: your topics of Land Reforms, Food Processing, Geographical factors. I hope you will let us know soon.

& one more thingSir we are waiting for final article of [Land Reforms] :forest rights act, draft national policy and few other misc topics & [Geography] LocationFactors : 6th and 7th Articles……Thanks in advance

Suman ShekharReply to this comment

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

Satya BratReply to this comment

thanks!!!

PTA27Reply to this comment

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

priya singhReply to this comment

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

Rohin kotwalReply to this comment

speechless Mrunal sir :)

SantoshReply to this comment

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

DheerajReply to this comment

One word…Awesome…

khushbooReply to this comment

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