Recently Indian central bank Reserve Bank of India’s report Currency and Finance has recommended that, the time span that was considered to measure whether monetary policy-setting panel has failed in achieving its objectives or not should be of four quarters rather than current time period of three-quarter. However, The bank made it clear that the report does not represent any institutional view with respect to it.

  • Currency and Finance 2020-21 report also recommends that roll the terms for the members in 6-member Monetary Policy Committee in order to moderate the political influence at the place of current appointments for the fixed term.
  • The recommendations in the RBI’s report have come after a period when the inflation target constantly touches upper-end of 6% headline inflation target for several months.
  • The expert also points out that, the Monetary policy committee should explain in this regard except for the lack of appropriate field visits to arrive at data during the nationwide lockdown.
  • Report highlights that, the definition for failure of Monetary Policy Committee needs to be revised from the present three-quarter horizon.
  • As per the report, the failure can be redefined as inflation overshooting or inflation undershooting the upper and lower tolerance bands around the set target for time span of four consecutive quarters.
  • It also said that; in the emerging markets which faces food and fuel inflation, for many central banks, failure is also conditional with respect to the inflation exceeding the tolerance limit for a specified time span and not immediately.
  • The Report emphasised that, there should be a greater flexibility for monetary policy and Monetary Policy Committee in order to go through sharp movements in food prices which are brought about by transient factors.
  • It further reveal that, the definition of failure that balances two objectives will help in preventing the volatility in the output growth which is brought by the policy responses.

Backdrop

The Currency and Finance 2020-21 Report stated that, there happens to be no failure of the Monetary Policy Committee in accordance with the 3-quarter definition till March 2020.

RBI Report Currency and Finance 2020-21 RBI Report Currency and Finance 2020-21