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Stress on identity in policy review

Mumbai, Aug. 21: The Reserve Bank of India today asked the government to work with it on a new monetary policy framework.

The central bank wants its “operational independence” to be considered while a review of the existing policy framework is done.

Various recommendations have been made with regard to a new monetary policy framework, of which two have generated heated debate — one made by the Financial Sector Legislative Reforms Commission (FSLRC), headed by Justice B.N. Srikrishna, and the other by a committee headed by RBI deputy governor Urjit Patel.

Both reports had recommended the setting up of a monetary policy committee. However, the FSLRC had proposed that the government would independently appoint three of the five external members to the committee and could consult the RBI chairman on the other two members.

On the other hand, the Urjit Patel-panel had suggested that the RBI governor should have a full say in the formation of the committee.

RBI governor Raghuram Rajan had hit out against some of the FSLRC recommendations in June.

Against this backdrop, the central bank today said in its annual report that three crucial points should be considered while creating a new framework. These include the objectives of the monetary policy.

Moreover, the report stated that the RBI’s operational independence to meet the targets set by the committee should be considered.

In doing so, the RBI supported inflation targeting. “Several countries have adopted inflation targeting with instrument independence for their central banks. In many cases, this has helped deliver low inflation. In fact, low inflation helps secure monetary as well as financial stability,’’ the report observed.

Based on the Urjit Patel-committee recommendations, the Reserve Bank has adopted a glide path for disinflation based on retail inflation.

 
 
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