Mumbai: A panel formed by Reserve Bank of India (RBI) Raghuram Rajan has suggested that the central bank focus primarily on managing inflation, switching to consumer prices from wholesale prices in setting its inflation target and making monetary policy.

RBI’s original mandate has been to ensure price stability while keeping an eye on growth. The panel, headed by RBI deputy governor Urjit Patel, said in its report, unveiled on Tuesday, that the nominal anchor of monetary policy should be inflation based on the consumer price index (CPI).

“This nominal anchor should be set by the Reserve Bank as its predominant objective of monetary policy in its policy statements," said the report posted on RBI’s website.

“The nominal anchor should be communicated without ambiguity, so as to ensure a monetary policy regime shift away from the current approach to one that is centred around the nominal anchor," the report said.

The report also said monetary policy should be decided by a committee and the final decision be based on the majority of votes cast by committee members. At present, the monetary policy decision vests exclusively with the RBI governor, with a technical advisory committee making suggestions that are not mandatory for the central bank chief to follow.

If the suggestion is accepted, RBI will fall in line with developed country central banks, including the US Federal Reserve where a committee decides on monetary policy and consumer prices are the main inflation gauge.

“Each member of the MPC (monetary policy committee) will have one vote with the outcome determined by majority voting, which has to be exercised without abstaining," the report said.

The minutes of the proceedings of the MPC will be released with a lag of two weeks from the date of the meeting.

“The MPC will be accountable for failure to establish and achieve the nominal anchor," it said.

The report also said RBI should conduct more term repurchases, through which banks can borrow for a longer period from the central bank, as a key element of liquidity management of the central bank.

The report comes at a time when the RBI has been under pressure to bolster slumping economic growth while battling to douse persistently high inflation. Economic growth slumped to 5% in the last fiscal year, the least in a decade, and further to an average 4.6% in the first half of the current fiscal year.

Inflation based on the CPI was 9.87% in December. Wholesale Price Index (WPI)-based inflation was 6.16% in December.

The Patel committee said RBI should fix the consumer price-based inflation target at 4% with a band of plus/minus 2% around it.

For now, RBI should try and bring down inflation from the current level to 8% over a period not exceeding the next 12 months, and to 6% over a period not exceeding the next 24 months “before formally adopting the recommended target of 4% inflation with a band of +/- 2%".

“The committee is also of the view that this transition path should be clearly communicated to the public," the report said.

However, to do that, it is important that the central government ensure that its fiscal deficit as a proportion of gross domestic product is brought down to 3% by 2016-17 and issues like administered prices, wages and interest rates that pose as “significant impediments to monetary policy transmission and achievement of the price stability objective", should be eliminated.

The government has set a fiscal deficit target of 4.8% for the current fiscal year.

The recommendations of the Patel committee were released ahead of the 28 January quarterly monetary policy review by the RBI. Since taking office in September, Rajan has twice raised the repo rate by a quarter of a percentage point each in the RBI’s battle against inflation.

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