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EconomyCommittees2014

Urjit Patel Committee

Adopt CPI inflation as the nominal anchor for monetary policy.

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Led to flexible inflation targeting and the Monetary Policy Committee.

Practise this in the app: flashcards, quiz and a timed answer
Prelims

Quick recall

What did the Urjit Patel Committee recommend?
Flexible inflation targeting with CPI as the anchor, and an MPC.
When did it report?
2014.
What target was adopted?
4% CPI inflation within 2% to 6%.
When was the RBI Act amended?
2016.
Which index anchors the target?
Consumer Price Index (combined).
What happens if inflation stays outside the band for three quarters?
The RBI must explain to the government.

Asked before in UPSC

Recurring theme: Inflation targeting and the monetary policy framework

Mains
  1. 2024 · GS3 · 10 marks

    What are the causes of persistent high food inflation in India? Comment on the effectiveness of the monetary policy of the RBI to control this type of inflation.

    The Urjit Patel Committee chose headline CPI, food-heavy, as the nominal anchor; supply-driven food inflation tests that choice.

  2. 2022 · GS2 · 15 marks

    Besides the welfare schemes, India needs deft management of inflation and unemployment to serve the poor and the underprivileged sections of the society. Discuss.

    Inflation targeting as a pro-poor policy, since CPI inflation hits those without indexed incomes hardest.

  3. 2019 · GS3 · 10 marks

    Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments.

    Low inflation after 2016 is often credited to the flexible inflation targeting framework the committee recommended.

Prelims
  1. 2017 · Prelims

    Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC)? 1. It decides the RBI's benchmark interest rates. 2. It is a 12-member body including the Governor of RBI and is reconstituted every year. 3. It functions under the Chairmanship of the Union Finance Minister. (a) 1 only (b) 1 and 2 only (c) 3 only (d) 2 and 3 only

    The MPC is the institutional outcome of the Urjit Patel Committee's recommendations.

The basics

Why it matters

The Urjit Patel Committee (2014) recommended that the RBI adopt flexible inflation targeting with CPI as the anchor, and set up a Monetary Policy Committee. It reshaped Indian monetary policy.

4% ± 2%
Inflation target that followed
Adopted in 2016.

From committee to law

The recommendations became law in stages.

Inflation targeting
  1. 2014Urjit Patel Committee report
  2. 2015Monetary Policy Framework Agreement
  3. 2016RBI Act amended; target 4% ± 2%
  4. 2016First MPC meeting
  5. 2021Target retained for 2021-26

You now know

  • Reported in 2014; chaired by then RBI Deputy Governor Urjit Patel.
  • Recommended CPI-based flexible inflation targeting.
  • Recommended a Monetary Policy Committee.
  • Led to the 2016 RBI Act amendment and the 4% ± 2% target.

Go deeper

In one line: The Urjit Patel Committee gave India a clear inflation target and a committee to pursue it.

Why it matters for UPSC

Monetary policy framework questions are frequent.

The core idea

A clear target anchors expectations. See Flexible inflation targeting and the Monetary Policy Committee.

Where to go next

In one line: Inflation targeting has brought more predictable policy.

Debates

Food-driven inflation, the band width, and whether growth should get more weight. See Flexible inflation targeting and Monetary Policy Committee.

Where to go next

Flexible inflation targeting

Aiming for low inflation with room for growth

In one line: Flexible inflation targeting aims at an inflation target while considering growth.

India

4% CPI with a 2-6% band.

Review

The target is set for five-year periods.

Where to go next

Monetary Policy Committee

Who sets the repo rate

In one line: The six-member MPC sets the repo rate.

Members

Three from the RBI, three external.

Voting

Governor has a casting vote.

Where to go next

Monetary Policy Committee: every story that connects to it (4)

Prelims-style quiz

  1. The Urjit Patel Committee recommended the nominal anchor to be:

    1. WPI
    2. Core inflation
    3. GDP deflator
    4. CPI
    Show answer

    Answer: (d) CPI. CPI inflation.

  2. Consider the following:
    1. The MPC was created by amending the RBI Act in 2016.
    2. The inflation target is 6%.
    Which of the statements given above is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Show answer

    Answer: (a) 1 only. The target is 4%, with a 2-6% band.

  3. Failure to meet the target means inflation outside the band for:

    1. Three consecutive quarters
    2. One quarter
    3. One month
    4. One year
    Show answer

    Answer: (a) Three consecutive quarters. Three consecutive quarters.

  4. Before inflation targeting, the RBI followed a:

    1. Single anchor
    2. Fixed exchange rate
    3. Multiple indicator approach
    4. Gold standard
    Show answer

    Answer: (c) Multiple indicator approach. Multiple indicator approach.

Syllabus

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