1. Mrunal Explain Urjit Patel Committee on Mon

8/18/2019 1. Mrunal Explain Urjit Patel Committee on Mon

1/15

- Mrunal - http://mrunal.org -

[Economy] RBI Urjit Patel Committee: 4% CPI, Nominal Anchor, Multiple Indicator,Monetary Policy Framework Reforms (Part 1 of 2)Posted By On 02/02/2014 @ 7:48 pm In Economy | 91 Comments

1. Prologue2. Monetary Policy reform: Where to focus?

1. #1: Focus on Exchange rate2. #2: Focus on Multiple indicators3. #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 rate2. Nominal Anchor (CPI): the 4% Target3. 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 won’t make much sense, unless you’re thorough with the concepts of monetary policy: itsfunctions, 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 threeCommittees:

http://mrunal.org/2014/01/banking-monetary-policy-quantitative-qualitative-tools-applications-limitations-msf-laf-repo-omo-crr-slr-revisited-before-upcoming-urjit-article.htmlhttp://mrunal.org/2014/01/banking-monetary-policy-quantitative-qualitative-tools-applications-limitations-msf-laf-repo-omo-crr-slr-revisited-before-upcoming-urjit-article.htmlhttp://-/?-


2/15

ChairmanOccupationin RBI

Topic Result

BimalJalan

RetireGovernor

New Bank licenses Work in progress.

NachiketMor

Boardmember

Financial products/ Financialinclusion

Published report in January 2014.Discussedin earlier articles.

UrjitPatel

DeputyGovernor

Monetary policy framework: how tostrengthen it?

Published report in Jan’14. This is the topicof our article.

Urjit Patel Committee: Basics1. Formed by: RBI (and not finance ministry)2. Official name: Expert Committee to Revise and Strengthen the Monetary Policy Framework3. 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 profilemembers 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.

UrjitMy first recommendation is that RBI must target inflation only. Nothing else- don’t focus onincreasing employment, don’t focus on increasing growth, don’t focus on stabilizing rupee-dollarexchange rate. Just focus on one thing and one thing only- Inflation.

http://mrunal.org/2014/01/banking-nachiket-panel-universal-electronic-banking-account-ueba-payment-access-points-financial-inclusion-seigniorage-and-more.html#1


3/15

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 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 hedo?

1. Rajan will tweak his monetary policy to reduce the supply of rupee in the market. Then, 1 apple willsell for Rs.50. (apple supply is same but rupee supply is decreased.)


4/15

2. Alternatively, Rajan will open his own refrigerator (forex reserve), and put some apples (dollars) forsale. 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 toaccomplish and whether Rajan is succeeding or failing? (if they ever get free after watching cricketmatches, 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 foodfrom 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 vsRupee

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 inRupee 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 inDollar. This also creates imbalance in supply-demand of rupee vs Dollars (Apples). Rajan will havehard time controlling this mess.

5. Country becomes vulnerable to Speculative attacks. e.g. Forex traders in Europe or China decide tohoard Apples (dollars) in their refrigerator to create artificial shortage in market, so later then cansell their apples @higher rate. In such speculative attacks, Rajan will have hard time controllingsupply-demand of Rupee vs dollars. He cannot prosecute them under FERA/FEMA laws, thosetraders live outside his jurisdiction.

6. Outdated: During WW1 era, most central banks used to follow this Exchange rate targetingstrategy. But today, almost all banks in developed countries, have shifted to inflation targetingstrategy. 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 toaccomplish? Bring down WPI by 5%, raise GDP to 9%…..no such targets. Just bol-bachhan.Therefore ineffective.


5/15

2. Multiple indicator strategy worked well between 1998 and 2008. GDP was good and inflation waskept in check. But in recent times, this strategy is no longer working- inflation has skyrocketed andGDP 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 designedwithout 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 totwelve 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 variouspressure groups. For example

Pressuregroup

informally forces Rajan to:

Chindu

Please increase SLR ratio. That way government is able to sell more of its securities tothe banks and- arrange cash from more schemes to increase employment- after allthat’s what you want- increase employment!Secondly, please increase the quota for women under Priority sector lending becauseRahul baba has been advocating “women empowerment” everywhere, including@Arnab Goswami’s interview.

Exporters/ITcompanies

Rajan Bhai, please tweak your monetary policy in such way that $1=becomes 1000rupees, then we earn more rupees 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 while importing stuff from abroad.

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

BankersMaai baap, please reduce PSL targets, SLR, CRR and Repo, that way more money is leftwith 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 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 thelimitations 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 aninflation-target say 2-6% and adjust his monetary policy so that inflation remains within that range.

Nominal anchor (CPI) method: Benefits/Advantages of

http://mrunal.org/2014/01/banking-monetary-policy-quantitative-qualitative-tools-applications-limitations-msf-laf-repo-omo-crr-slr-revisited-before-upcoming-urjit-article.html#991


6/15

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. BecauseRajan

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 Chairman2007 Mumbai as International Finance Center Percy Mistry2009 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 tocontrol CPI, it’ll 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 controlover this.Fuel/crude oil prices= depend on external factors and Rupee-Dollar exchange rate. Rajandoesn’t have sufficient forex reserves to control rupee-dollar exchange rate in the mannerhe 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 andfuel inflation).That’s why his policy has remained ineffective in controlling inflation.Because he alwaysignored food and fuel inflation.Infact, We must focus on CPI – for the very same reason-because it give >50% weightageto the food and fuel inflation.

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

UrjitNo problem. We must focus only on CPI (Combined). Its data is released @every 12 days. Veryeasy to monitor, tracks price 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 helpyou. Fidel Castro and Che Guevara cannot fix India’s inflation problem. This only gets fixed frominside the RBI!

MohanBut even if Rajan focuses on this Nominal Anchor (CPI), still there will be a lag of 6-8 monthsbefore 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.We’ve already learned this limitation of monetary policy in developing countries. Click me.

MohanOk 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?

MohanSo 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= Rajan’s statistical projections willbecome wrong and his monetary policy will become #EPIFAIL.

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

regarding inflation control.

Why Target inflation?

I’m still not clear. Why should Rajan only focus on inflation (CPI). Other things are also important –


7/15

Mohan like GDP, IIP, employment, investment, exchange rates. why focus on CPI only, and ignoreeverything 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 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. OnlyIndia is the #EPICFAIL country where inflation has increased- instead of decreasing!Higher inflation = real interest rates decreased => makes people buy more gold=>CAD=>rupeeweaken=>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 20 100 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%


8/15

Fixed deposit 9.00% 11% -2%

From above table, you can see Banks in India offer “negative” real interest. Therefore, people prefer toinvest in gold, instead of putting money in bank accounts.

Result:

Excessive gold import=>Current account deficit increased=>Rupee Weaken =>Petrol/dieselexpensive=>even more inflation. This becomes a vicious cycle where you cannot find whether hencame first or the egg came first?

When people invest money in gold, instead of putting it in bank=> businessmen get lessloans=>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=> realinterest rate would be higher => people invest less in gold=> more money flows towardsbanks=>business loans=>higher GDP, higher IIP (index of industrial production).

UrjitIn other words, when Rajan frames monetary policy, he should only fight against inflation – thenlow 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%??

MohanThis is easy. Rajan should design monetary policy in such way, that CPI is -50%. If bottle of desiliquor was sold @100 Rs. in 2010, then in 2014 its price should reduce to Rs.50 only. Then Maujaahi 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 motivationto 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 alsodecrease. Then government has less money to spend on education, healthcare, social sector,defense, law and order = poverty, disease, crime.


9/15

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 affectsGDP 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% minimum

and 4+2=6% maximumMohan 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. Therewill be unanticipated price shocks in food and fuel items, wars, famines and naturaldisasters.Therefore, Rajan should be given some ‘room’ to accommodate such shocks – that’s why2-6% 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 framework

You 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 factorsoutside Rajan’s control like monsoon and black marketers. I don’t think Rajan can ever bring downinflation to 4% level.

Urjit It is possible. Let me give you the case study of Chile.


10/15

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 seeChile’s RBI has successfully managed to contain inflation within that 2-4% level.

Urjit recommended following timeframe:

0 month (i.e. when Urjit was makingreport)

CPI is ~10%

Within 12 months RBI should reduce CPI to 8%Within 24 months RBI should reduce CPI to 6%

ThenJust 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 extremesituation) because unpredictable policy making= not good for banking sector’s ownbusiness plans and tactical projections .


11/15

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 usingRepo rate as its “policy rate”. But it has failed to yield any positive result. What makes you thinkrepo rate can fix our inflation problems?

UrjitSwami Vivekanand has said “Aim higher.” On the same logic, I recommend Repo Rate should bekept higher than CPI. Then it’ll fix the problem.

Observe.

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 monetarypolicy, 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 beincreased 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

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 they’ve to pay more interest rate)Banks will increase their loan interest rates (because they’ve less new money and still want to keepprofit 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.= inflationreduced.

Wait wait wait. Urjit Patel, you’re a “hawkish” person, a person who believes inflation can be fought


12/15

Mohan by increasing the interest rates.

Urjit So what?

Mohan

So man…Rajan raises Repo rate=>SBI increases loan interest rates=>harder to borrow forbusinessmen=>less business expansion =>less new jobs=>deflationary trend=>this willhurt our GDP.CRISIL, Moody and other experts have made statistical projections- that even in 2015, ourCPI 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 takensame measure in past.When inflation became very high, they raised repo rate to level higher than inflation. Onlythen problem was fixed.

MohanWhatever 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 laptopand Prepares to leave.)

UrjitWAIT! Picture abhi baaki hai mere dost . Overall I made three important recommendations. In thisarticle we only learned the 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 click me)3. @Rajan fix accountability in your gang. (=in next article click me)

http://mrunal.org/2014/02/economy-urjit-patel-committee-fixing-accountability-in-rbi-monetary-policy-committee-decision-by-majority-fiscal-deficit-part-2-of-2.htmlhttp://mrunal.org/2014/02/economy-urjit-patel-committee-fixing-accountability-in-rbi-monetary-policy-committee-decision-by-majority-fiscal-deficit-part-2-of-2.html


13/15

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 inflation

b. 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 ismost 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 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 that

a. RBI should continue with multiple indicator method to frame monetary policy, whiletargeting 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 theconsequences?

1. Country becomes vulnerable to shocks emanating from the country to which its currency ispegged.

2. Country becomes immune to speculative attacks in forex trading market.3. Imported inflation will be kept in check.

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


14/15

Q10. Match the following:

I. Hawk1. Purchases securities under the assumption that they can be sold later at a higher

price.

II. Bull2. 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 IIIII

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

OptionsI IIIII 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 nextarticle.

MCQ hints:

1. incorrect statement is B2. technical formula is bit different- but here opt B3. last one4. 6 both bad.5. second last6. neither7. none8. second statement is wrong.

9. only first statement is right10. 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.

http://mrunal.org/Economy


15/15

Article printed from Mrunal: http://mrunal.org

URL to 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

Copyright © 2014 Mrunal. All rights reserved.

Documents

1. Mrunal Explain Urjit Patel Committee on Mon