RBI’s Report on Currency and Finance 2020-21

February 26, 2021

A Currency and Finance (RCF) report by Reserve Bank of India (RBI) official 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, RBI made it clear that the report does not represent any institutional view with respect to it.

Key Findings

The report also recommends that roll the terms for the members in six-member Monetary Policy Committee (MPC) in order to moderate the political influence at the place of current appointments for the fixed term.
The recommendations in the report have come after a period when the inflation target constantly touches upper-end of 6 per cent 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 lockdown.
Report highlights that, the definition for failure of MPC needs to be revised from the present three-quarter horizon.
According to 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.
Report 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.
Report emphasised that, there should be a greater flexibility for monetary policy and MPC in order to go through sharp movements in food prices which are brought about by transient factors.
The report further states 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.