[Economy] RBI Urjit Patel Committee: 4% CPI, Nominal Anchor, Multiple Indicator, Monetary Policy Framework Reforms (Part 1 of 2)

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  1. Prologue
  2. Monetary Policy reform: Where to focus?
    1. #1: Focus on Exchange rate
    2. #2: Focus on Multiple indicators
    3. #3: focus on inflation
      1. Nominal anchor (CPI) method: Benefits/Advantages of
      2. Nominal anchor (CPI) method: Drawbacks/Limitations/Anti-arguments
  3. Why Target inflation?
    1. Nominal vs Real interest rate
    2. Nominal Anchor (CPI): the 4% Target
    3. Nominal Anchor CPI 4%: WHEN to reach?
    4. Nominal Anchor CPI 4%: How to reach?
  4. Hawkish trend: Why interest rates will rise?
  5. Mock Questions


This article won’t make much sense, unless you’re thorough with the concepts of monetary policy: its functions, tools and limitation.  So make sure you’ve read the previous article. click me.

  • Place: RBI’s Main Adda @Mumbai
  • Time: September 2013
  • Boss: Rajan has recently taken charge as the new governor of RBI. Immediately he setups three Committees:

RBI Committees 2013-14 monetary policy reform

ChairmanOccupation in RBITopicResult
Bimal JalanRetire GovernorNew Bank licensesWork in progress.
Nachiket MorBoard memberFinancial products/ Financial inclusionPublished report in January 2014.Discussed in earlier articles.
Urjit PatelDeputy GovernorMonetary policy framework: how to strengthen it?Published report in Jan’14. This is the topic of our article.

Urjit Patel Committee: Basics

  1. Formed by: RBI  (and not finance ministry)
  2. Official name: Expert Committee to Revise and Strengthen the Monetary Policy Framework
  3. Chairman: Dr. Urjit Patel, Dy. Governor of RBI
  4. Eight Members: economics professors, finance experts etc. They’re not important for exams, because No high profile members. [may be because Nachiket took away all the high profile members like Shikha Sharma of Axis bank, so Urjit bhai was left with only chillar parties.]

Overall, Urjit Patel’s main recommendations can be summarized in just three lines:

Urjit Patel Committee recommendations on monetary policy reform

  1. @Rajan, you fight inflation. [Nominal anchor, 4% CPI and everything]
  2. @Rajan, you fix accountability in your own gang. [form MPC Committee, decisions by voting etc.]
  3. @Chindu, you give cover-fire to Rajan, while he is fighting inflation. [fiscal consolidation.]

Let’s start with first recommendation.

UrjitMy first recommendation is that RBI must target inflation only. Nothing else- don’t focus on increasing employment, don’t focus on increasing growth, don’t focus on stabilizing rupee-dollar exchange rate. Just focus on one thing  and one thing only- Inflation.
MohanBut why focus on inflation only?

Monetary Policy: Where to focus?

Monetary Policy reform: Why Focus inflation

There are three main ways to frame monetary policy

  1. Focus on Exchange Rate
  2. Focus Multiple indicator (GDP, IIP, Exchange rate, inflation)
  3. Focus on Inflation (started in 80s)

Let’s check the pros and cons of each strategy.

#1: Focus on Exchange rate

  • If RBI adopts this strategy/method to frame monetary policy then- what will happen?
  • Rajan will first decide an ideal “target” exchange rate say 1$=Rs.50.
  • Then he’ll try to amend monetary policy to control rupee supply in the market.

To put this in technically incorrect example: Imagine dollars are “apples”.

  • Prices of apple vs Rupee are decided by laws of supply and demand.
  • At present 1 apple sells for Rs.60. But Rajan wants to bring it 1 Apple=50 rupees. What should he do?
  1. Rajan will tweak his monetary policy to reduce the supply of rupee in the market. Then, 1 apple will sell for Rs.50. (apple supply is same but rupee supply is decreased.)
  2. Alternatively, Rajan will open his own refrigerator (forex reserve), and put some apples (dollars) for sale. That’ll also bring down prices of 1 apple =50 rupees. (because apple supply increased)

Advantages/Benefits of targeting Exchange rate?

  1. Prices of imported goods are kept in check.
  2. Prices of imported crude oil is kept in check. (so indirectly inflation is kept in check).
  3. Since exchange rates are kept stable- both importers and exporters can decide their business expansion plans accurately. (compared to a situation where exchange rate is volatile-say today $1=40 Rs. And tomorrow $1=60Rs. Then it is not good for business decisions.)
  4. Clarity. Transparency in Decision Making. Aam Juntaa can understand what RBI is trying to accomplish and whether Rajan is succeeding or failing? (if they ever get free after watching cricket matches, Saas-Bahu serials and (un)reality shows.)

Disadvantages/limitations of targeting Exchange rate?

  1. This method works well to control (imported) fuel inflation. But cannot control (local) food inflation.
  1. Works well for a small countries. Because their population is small, they can even import food  from India, China and just focus on export competitiveness in electronics and consumer goods. e.g. Singapore, Taiwan etc.
  2. But Doesn’t work for large countries like India, Mexico or Brazil. Our population is so large, we cannot sustain on imported food. We must be self-reliant in food production.
  3. Country becomes vulnerable to external shocks. Continuing the previous example of Apple vs Rupee
    1. What if American RBI tightens their own monetary policy to control local American inflation (= US Feds follow a dear money policy =dollar (apple) supply is reduced.)
    2. Then Rajan’s statistical projections will go wrong. He’ll have to make new adjustments in Rupee vs Dollar (Apple) quantity in Indian market.
  4. Government is bogus, and causes high food inflation. Result= Real interest rates become negative, Juntaa will start investing more in gold=>Gold import increased=>payments have to be made in Dollar. This also creates imbalance in supply-demand of rupee vs Dollars (Apples). Rajan will have hard time controlling this mess.
  5. Country becomes vulnerable to Speculative attacks. e.g. Forex traders in Europe or China decide to hoard Apples (dollars) in their refrigerator to create artificial shortage in market, so later then can sell their apples @higher rate. In such speculative attacks, Rajan will have hard time controlling supply-demand of Rupee vs dollars. He cannot prosecute them under FERA/FEMA laws, those traders live outside his jurisdiction.
  6. Outdated: During WW1 era, most central banks used to follow this Exchange rate targeting strategy. But today, almost all banks in developed countries, have shifted to inflation targeting strategy. Only few exceptions- like Singapore’s RBI – use this strategy.

Moving to next method/strategy

#2: Focus on Multiple indicators

At present, this is the strategy RBI uses for making monetary policy.

Under multiple indicator method, Rajan will first gather information about:

  1. Index of industrial production (IIP), Consumer confidence
  2. Professional forecasts (CRISIL, S&P, Moody, World Bank) about GDP, inflation, unemployment
  3. Inflation data: WPI minus food, fuel.

Then, he will design the monetary policy (mainly repo rate), with following objectives/focuses:

  1. Increase employment
  2. Increase GDP
  3. Stabilize inflation
  4. Stabilize exchange rate

Sounds fair enough? Not really!

Multiple indicator method: Negative points/ Limitations

  1. Multiple indictor method has no “nominal anchor”- no actual target. What exactly are you trying to accomplish? Bring down WPI by 5%, raise GDP to 9%…..no such targets. Just bol-bachhan. Therefore ineffective.
  2. Multiple indicator strategy worked well between 1998 and 2008. GDP was good and inflation was kept in check. But in recent times, this strategy is no longer working- inflation has skyrocketed and GDP is falling day by day.
  3. Since 2008, Consumer price index rose to double digits (i.e. 10% or more)
  4. But RBI doesn’t focus on CPI. They only focus on WPI (minus food and fuel). Result?
    1. WPI doesn’t track changes in the service sector related inflation (e.g. doctor, physiotherapist, IT, call center etc.)
    2. Service sector contributes more than 60% of GDP. So, when monetary policy is designed without considering service sector inflation=then it’ll be ineffective.
  5. WPI commodity list has been revised in recent times- they added ice cream, oven, cricket ball, guitar and so on. Result?
    1. RBI has to make new statistical calculation about each of such busines arenas- number of people employed in it, total bank loans given, their contribution to GDP etc.
    2. But when WPI commodity list is revised, RBI has to calculate new statistical projections= problem. Policy doesn’t give effective result in the meantime.
  6. Even if Rajan makes best policy, its Impact will be seen after a lag of 3-4 quarters (i.e. nine to twelve month). Why? We already learned the limitations of Monetary policy in a developing country, the past article. Click me
  7. Since this strategy doesn’t have a clear cut transparent targets, it becomes vulnerable to various pressure groups. For example
Pressure groupinformally forces Rajan to:
  • Please increase SLR ratio. That way government is able to sell more of its securities to the banks and- arrange cash from more schemes to increase employment- after all that’s what you want- increase employment!
  • Secondly, please increase the quota for women under Priority sector lending because Rahul baba has been advocating “women empowerment” everywhere, including @Arnab Goswami’s interview.
Exporters/ IT companies
  • Rajan Bhai, please tweak your monetary policy in such way that $1=becomes 1000 rupees, then we earn more rupees while exporting goods n services abroad.
  • Please design your monetary policy in such way that $1 = Rs.1. then we’ve to spend less rupees while importing stuff from abroad.
  • Please decrease Priority sector lending, CRR and SLR that way more money is left for business loans for corporate giants.
  • Maai baap, please reduce PSL targets, SLR, CRR and Repo, that way more money is left with us, and we can lend it to middle class and businessmen.

Therefore, Urjit recommends Rajan to dump this multiple indicator method.

MohanOk boss. So far I’ve learned following:

  1. Monetary policy should not focus on exchange rate because our country is very large, unlike Singapore and Taiwan.
  2. Monetary policy should not focus on “multiple indicator” approach, because of the limitations we just saw in above paragraph.

Then what is your solution?

UrjitSimple. Focus on inflation

#3: focus on inflation

In this strategy- Rajan will decide a “Nominal Anchor” say CPI -to monitor inflation. Then he’ll fix an inflation-target say 2-6% and adjust his monetary policy so that inflation remains within that range.

Nominal anchor (CPI) method: Benefits/Advantages of

  1. Once Rajan sets a CPI target. Noone can ‘influence’ him or put informal pressure- be it Chindu, Exporters, Importers, FICCI, Mallya, Ambani or Bankers cannot influence Rajan’s policy. Because Rajan
  2. Easy to track progress. Because CPI data released after every twelve days.
  3. Central banks in all advanced economies and Emerging market economies have adopted this method. (Except India and China).
  4. It brings transparency. Even aam-juntaa can understand what RBI’s policy is and whether it’s yielding result or not? Because there is only target to monitor=CPI.

Previous Committees have also directly/indirectly recommended for this system. For example:

2007Mumbai as International Finance CenterPercy Mistry
2009Financial sector reformRajan the Boss himself
2013Financial  Sector Legislative Reforms Commission (FSLRC)BN SriKrishna

Nominal anchor (CPI) method: Drawbacks/Limitations/Anti-arguments

MohanHold on a second. You’re trying to paint a very rosy picture. But if Rajan’s monetary policy tries to control CPI, it’ll have many problems!
UrjitSuch as…??
MohanIn CPI index- more than 50% weightage is given to food and fuel components.

  • Food prices= depend on monsoon and blackmarketers. Rajan has absolutely zero control over this.
  • Fuel/crude oil prices= depend on external factors and Rupee-Dollar exchange rate. Rajan doesn’t have sufficient forex reserves to control rupee-dollar exchange rate in the manner he wants (e.g. 1$=50 rupees and not 1$=60 Rs.)
  • You’re right. But under multiple indicator method, Rajan focuses on WPI (minus food and fuel inflation).
  • That’s why his policy has remained ineffective in controlling inflation.Because he always ignored food and fuel inflation.
  • Infact, We must focus on CPI – for the very same reason-because it give >50% weightage to the food and fuel inflation.
MohanPoint taken. But in India, we have three CPIs: Urban, Rural and Combined…if we try to control all three of them, then…..
UrjitNo problem. We must focus only on CPI (Combined). Its data is released @every 12 days. Very easy to monitor, tracks price movement all over India.
MohanYa but still, Its data is not accurate and….
Urjityaar if you start to find fault in everything (like a TheH**** columnist), ….then only God can help you. Fidel Castro and Che Guevara cannot fix India’s inflation problem. This only gets fixed from inside the RBI!
MohanBut even if Rajan focuses on this Nominal Anchor (CPI), still there will be a lag of 6-8 months before its impacts are seen.
UrjitBrother, no matter which method we use – there will be lag of 6-8 months before its impact is seen on inflation @ground level.

  • Because we are  not a developed country, we are a developing country.
  • We’ve already learned this limitation of monetary policy in developing countries. Click me.
MohanOk one last obstacle. Governments own policy to fight CPI. For example, whenever prices of sugar, onion or pulses get very high, the government arbitrarily puts export ban on those commodities, start importing them from xyz country, starts distributing them @subsidized rates in various cities.
MohanSo Rajan may be designed his policy to fight CPI using abc statistical projections but at random, the government will do xyz policy on its own to fight inflation= Rajan’s statistical projections will become wrong and his monetary policy will become #EPIFAIL.
UrjitFor this I recommend better coordination and data sharing between Government of India and RBI, regarding inflation control.

Why Target inflation?

MohanI’m still not clear. Why should Rajan only focus on inflation (CPI). Other things are also important – like GDP, IIP, employment, investment, exchange rates. why focus on CPI only, and ignore everything else?
Urjitlet me explain:

petrol and onion prices, hardship to middleclass= those are clichéd points. Let’s learn some new points.

  • In recent years, India’s inflation has been highest among all G20 countries.
  • India’s inflation has been higher than its trade competitors.

inflation India vs world 2008-12


From above table, you can see that

  • Between 2008 to 2012- China, South Africa and Russia have drastically reduced their inflation. Only India is the #EPICFAIL country where inflation has increased- instead of decreasing!
  • Higher inflation = real interest rates decreased => makes people buy more gold=>CAD=>rupee weaken=>petrol expensive=>everything expensive=>every more inflation =vicious cycle.
MohanWhoa, whoa, whoa man slow down. What is real interest rate? How does it affect economy?

Nominal vs Real interest rate

UrjitSuppose I’ve 100 rupees. But instead of buying onions, I put this money in a savings account.

Observe what happens with my purchasing power:

Onion Rs./kgMoneyHow much can you Buy?
1st Jan201005 kg
31st Dec100104~1 kg

Meaning, although bank increased your money from Rs.100 to 104, but you can buy very less onions. Therefore, we must not focus on nominal interest rate i.e. 4% but on real interest rate.

Bank depositNominal Interest RateCPI (Inflation)Real Rate of Interest=(Nominal-Inflation)
Savings account4.00%11%-7%
Fixed deposit9.00%11%-2%

From above table, you can see Banks in India offer “negative” real interest. Therefore, people prefer to invest in gold, instead of putting money in bank accounts.


  • Excessive gold import=>Current account deficit increased=>Rupee Weaken =>Petrol/diesel expensive=>even more inflation. This becomes a vicious cycle where you cannot find whether hen came first or the egg came first?
  • When people invest money in gold, instead of putting it in bank=> businessmen get less loans=>less expansion =>less jobs=> less growth in GDP.
  • Now if you compare India vs [China, Russia, South Africa]. You can see- their inflation is low=> real interest rate would  be higher => people invest less in gold=> more money flows towards banks=>business loans=>higher GDP, higher IIP (index of industrial production).

inflation India vs world 2008-12

UrjitIn other words, when Rajan frames monetary policy, he should only fight against inflation – then low GDP, low IIP will be fixed automatically.
Mohanfair enough.

Nominal Anchor (CPI): the 4% Target

Ok far we’ve learned:

When Rajan frames monetary policy

  1. He must focus on fighting inflation only.
  2. To fight inflation, he must focus on “CPI”.

Now the problem? What should be his exact CPI target? 4%, 5%. 0%, -50%??

MohanThis is easy. Rajan should design monetary policy in such way, that CPI is -50%. If bottle of desi liquor was sold @100 Rs. in 2010, then in 2014 its price should reduce to Rs.50 only. Then Maujaa hi Maujaa.
UrjitI hate to break your spirit, but such deflationary trend is not good for economy.
  • Every business has ‘fixed cost of production’ minimum light bill, phone bill, office rent, staff salary etc. So, if prices keep falling and falling, then businessman will suffer losses. He has no motivation to expand business. He wants to cut down his production costs, by firing some of the employees= less new jobs created= unemployment = social unrest.
  • If prices of everything fall- then custom duty, VAT, excise duty, service tax- their collection will also decrease. Then government has less money to spend on education, healthcare, social sector, defense, law and order = poverty, disease, crime.
MohanThen what should be the “minimum” target? What should be the lower limit of inflation?
UrjitMinimum 2% inflation is necessary in any economy.
MohanThen what should be the “maximum” limit for inflation/CPI?
UrjitI’ve analyzed data from various countries. When CPI gets higher than 6.2%, it negatively affects GDP and employment. Therefore Rajan should ensure CPI inflation doesn’t cross more than 6%.
MohanOk, minimum 2% and maximum 6%.
UrjitRight RBI should try to get CPI inflation @4% with band of +/-2%.

  • meaning 4-2=2% minimum
  • and 4+2=6% maximum
MohanBut why give this 2% band? Why not just say 4% is our target?
  • Because in real life, it is not possible to get inflation controlled @exactly 4% level. There will be unanticipated price shocks in food and fuel items, wars, famines and natural disasters.
  • Therefore, Rajan should be given some ‘room’ to accommodate such shocks – that’s why 2-6% target.

Besides, the RBIs of other countries also use similar ‘band’ method: observe

Central Bank ofCPI target under their monetary policy
South Africa3-6%

So, it’s a tried and tested method. we should follow the same.

Nominal Anchor CPI 4%: WHEN to reach?

MohanOk so far I’ve learned:

  • Urjit Patel Committee wants to strengthen monetary policy framework
  • You insist RBI to fight inflation only.
  • You even gave Rajan a target: 4% CPI (Combined), with +/-2% band
UrjitThat is correct.
Mohanwell, Your recommendation is ambitious, but unrealistic. I repeat again- There are many factors outside Rajan’s control like monsoon and black marketers. I don’t think Rajan can ever bring down inflation to 4% level.
UrjitIt is possible. Let me give you the case study of Chile.

Chile Central bank inflation target

  • During 90s, Chile was facing CPI inflation as high as 25%.
  • But in the early 2000s, the RBI of Chile made the target “3% CPI (With +/-1% band)”=2-4% CPI
  • Now observe the following graph- particularly the green band between 2002 to 2006. You can see Chile’s RBI has successfully managed to contain inflation within that 2-4% level.

Urjit recommended following timeframe:

Urjit Patel CPI reduction timeframe

0 month (i.e. when Urjit was making report)CPI is ~10%
Within 12 monthsRBI should reduce CPI to 8%
Within 24 monthsRBI should reduce CPI to 6%
ThenJust try to maintain inflation within the 2-6% range. (i.e. 4% with +/-2% band)

In short: 0/12/24 (months)=>10/8/6 (CPI)

Nominal Anchor CPI 4%: How to reach?

MohanAlright. If Chile can do it, we can also do it. But HOW?
  • Using the same tools available in the present monetary policy framework.
  • Especially the “policy rate”.
MohanWhat is policy rate?
UrjitRepo rate under Liquidity adjustment facility (LAF)= that’s our policy rate.
  • And reverse repo(RR) = Repo – minus 1%;
  • MSF=Repo +plus 1%
  • ^This system is fine. I recommend that Rajan should continue with it.
  • RBI should not change this +/- 1% spread between RR-Repo-MSF. (unless in extreme situation) because unpredictable policy making= not good for banking sector’s own business plans and tactical projections .

Repo Reverse Repo MSF

Hawkish trend: Why interest rates will rise?

MohanOk so far I’ve learned:

  • Urjit Patel Committee wants to strengthen monetary policy framework
  • You insist RBI to fight inflation only.
  • You even gave Rajan a target: 4% CPI (Combined), with +/-2% band
  • You even gave Rajan a timeframe: 0/12/24 (months)=>10/8/6 (CPI)
  • You even gave Rajan the firing “strategy”: fight inflation via Policy rate (Repo Rate)
UrjitThat is correct.
MohanBut then what’s the new story my friend? All these years, RBI has tried to fight inflation by using Repo rate as its “policy rate”.  But it has failed to yield any positive result. What makes you think repo rate can fix our inflation problems?
UrjitSwami Vivekanand has said “Aim higher.” On the same logic, I recommend Repo Rate should be kept higher than CPI.  Then it’ll fix the problem.


At present
Difference (Repo MINUS CPI)-2

You can see Repo rate is lower than CPI. That’s why its ineffective. In the previous article on monetary policy, we learned that

Monetary policy ToolHow to Fight inflation?How to fight deflation?
Repo rateIncrease repo rateDecrease repo rate.

Therefore, to fight inflation repo rate MUST be increased. Urjit Patel recommends that Repo rate should be increased so much that its higher than CPI.

At presentUrjit Patel’s recommendation
Repo8%Should be higher than CPI. Here CPI=10, so let’s keep Repo @11%
Difference(Repo MINUS CPI)-2(11-10)=+1

In other words, Urjit Patel recommends that difference between Policy rate (Repo rate) and CPI should be “positive”, Only then Policy rate can fight inflation.

What will be the consequences of high repo rate?

  • Banks borrow less from RBI (Because they’ve to pay more interest rate)
  • Banks will increase their loan interest rates (because they’ve less new money and still want to keep profit margin same)
  • Less business expansion (because less people take loans, due to higher interest rate)
  • Less new jobs created
  • Less income
  • Less demand
  • Sellers will reduce Prices of goods and services, to attract and retain customers.= inflation reduced.
MohanWait wait wait. Urjit Patel, you’re a “hawkish” person, a person who believes inflation can be fought by increasing the interest rates.
UrjitSo what?
  • So man…Rajan raises Repo rate=>SBI increases loan interest rates=>harder to borrow for businessmen=>less business expansion =>less new jobs=>deflationary trend=>this will hurt our GDP.
  • CRISIL, Moody and other experts have made statistical projections- that even in 2015, our CPI will be ~8.5%. So by your logic, Rajan should keep Repo @9%. It will kill the growth!
  • Theoretically you’re right. High interest rates are not conductive for higher GDP growth.
  • But Indian inflation has become so high, that extreme steps are necessary.
  • Besides, the RBIs of Australia, Canada, S.Africa, Mexico, Brazil, Israel…… all have taken same measure in past.
  • When inflation became very high, they raised repo rate to level higher than inflation. Only then problem was fixed.
MohanWhatever man. I’m going to write a column in TheH**** to criticize you that “If Urjit Patel Committee’s report is implemented, interest rates will rise and growth will be killed.” (Packs his laptop and Prepares to leave.)
UrjitWAIT! Picture abhi baaki hai mere dost. Overall I made three important recommendations. In this article we only learned the first one:
  1. @RBI fight inflation
    1. Target=4% CPI, +/-2% Band [=control inflation in 2-6% range.]
    2. Tool=Repo as policy rate, +/-1% spread in RR-Repo-MSF,
    3. Time limit: 0/12/24 (months)=10/8/6% (CPI)
    4. Strategy=keep repo higher than CPI.
  2. @Chindu, give cover fire to Rajan, while he is fighting inflation (=in next article click me)
  3. @Rajan fix accountability in your gang. (=in next article click me)

Urjit Patel Committee recommendations

Mock Questions

  1. Incorrect statement
    1. Nominal interest rate doesn’t take inflation into account.
    2. Real interest rate doesn’t take Nominal interest rate into account.
    3. Both A and B
    4. Neither A nor B
  2. What do you understand by Real interest rate?
    1. Nominal interest rate plus inflation
    2. Nominal interest rate minus inflation
    3. Nominal interest rate multiplied with inflation
    4. None of above.
  3. In a futuristic society, if Real interest rate became a positive number, which of the following is most likely to be correct?
    1. Fiscal deficit increased at the expense of current account deficit.
    2. People have started putting their entire savings into gold.
    3. RBI and Government failed in combating inflation.
    4. RBI and government successfully managed to bring down inflation below the nominal interest offered in banks.
  4. Urjit Patel Committee has observed that
    1. CPI lower than 2% is good for economy but CPI higher than 6% is bad for economy
    2. CPI lower than 2% facilitates growth but CPI higher than 6% reduces employment.
    3. CPI lower than 2% and higher than 6%, are bad for GDP and employment.
    4. None of above.
  5. Urjit Patel Committee has recommended that
    1. RBI should continue with multiple indicator method to frame monetary policy, while targeting 4% inflation.
    2. RBI should ignore fuel, food and service sector inflation and focus on core inflation only.
    3. RBI should frame monetary policy while keeping CPI as the nominal anchor.
    4. None of above.
  6. Urjit Patel recommends RBI to:
    1. Bring down consumer price index inflation to 6% within next twelve months.
    2. Switch its focus from multiple indicators to exchange rate stabilization
    3. both A and B
    4. Neither A nor B.
  7. To Combat inflation, Urjit Patel Committee has recommended RBI to:
    1. Keep Repo rate lower than CPI.
    2. Keep Reverse repo rate higher than MSF.
    3. Keep the value of Reverse repo rate between Repo rate and MSF.
    4. None of Above.

Q8. If RBI frames monetary policy with primary objective of stabilizing the exchange rate, what will be the consequences?

  1. Country becomes vulnerable to shocks emanating from the country to which its currency is pegged.
  2. Country becomes immune to speculative attacks in forex trading market.
  3. Imported inflation will be kept in check.


  1. Only 1 and 2
  2. Only 2 and 3
  3. Only 1 and 3
  4. All 1, 2 and 3.

Q9. What are the recommendations of Urjit Patel Committee?

  1. Inflation should be the nominal anchor for the monetary policy framework.
  2. RBI should adopt the new CPI (rural) as the measure of the nominal anchor for policy communication.
  3. WPI inflation should be set at 4 per cent with a band of +/- 2

Answer choices

  1. Only 1 and 2
  2. Only 2 and 3
  3. Only 1 and 3
  4. Only 1

Q10. Match the following:

  1. Hawk
  1. Purchases securities under the assumption that they can be sold later at a higher price.
  1. Bull
  1. Believes that a particular stock or the market as a whole, is headed for a fall in prices.
  1. Bear
  1. Favors relatively high interest rates in order to keep inflation in check.
  1. Favors relatively low interest rates in order to keep deflation in check.

Answer choices


Q11. Match following

  1. Nachiket Mor
  1. Nominal Anchor Method to frame Monetary Policy
  1. Urjit Patel
  1. Financial  Sector Legislative Reforms
  1. BN SriKrishna
  1. Governance of Boards of Banks in India.
  1. P. J. Nayak
  1. Financial products for small businessmen.
  1. State backwardness index

Answer choices


Mains / interview type questions, once we finish remaining recommendations of the committee in next article.

MCQ hints:

  1. incorrect statement is B
  2. technical formula is bit different- but here opt B
  3. last one
  4. <2 and >6 both bad.
  5. second last
  6. neither
  7. none
  8. second statement is wrong.
  9. only first statement is right
  10. hawk-interest, bull -will rise; bears-will fall
  11. Nachi- products, Urjit- Nominal, BN-reforms, Nayak-Board.

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So far 116 Comments posted

  1. Sree

    where is part 2.?. waiting for that

      1. NIKHILESH

        dada,why cpi less than 2% bad for economy….

        1. Sujit

          Deflation is not also good so cpi should be at least 2% .

      2. Abhay

        this link cannot be accessed

  2. Ganesh Babu S

    Its a personal suggestion. It will be great if you can share the source of the articles posted too. If I am right for this article you have researched the editorial “Inflation Targeting:A Controversial Shift” in EPW along with other sources. Giving the source address can definitely be helpful if someone wishes to further enhance his knowledge.
    Thank you

    1. pradeep

      @babu: doing phd in these topics is not necessary… n dont get offended plz

  3. Rinu

    Urjith Patel is boring…
    You presented it very well Though Admin

  4. ashish

    dude.. you rock

  5. Mohit

    Hats off Mrunal, to the way you use innovation and to the way you present! Keep up the good work!

  6. Rohit

    Hi Mrunal,in your last article you have written that repo rate wud nt be that effective to control inflation as banks does not depend largely on RBI for their money requirement,instead they(banks) tend to fulfill their money need from saving accounts and fixed deposite accounts…then how come this strategy of controlling inflation thru repo rate wud work???…plzzz reply…

    1. Sunny

      Same doubt. Rohit did you find something regarding this??

      1. ashish

        that’s why time frame of 0/12/24 is given because it takes time to respond in developing country………..

  7. madhu


  8. akshat mittal

    can i download pdf version of thee articles..??

    1. abhay

      yes dude, open this link through chrome browser, then press ctrl+p, and change the setting to save the file in pdf.

  9. vineesh

    Excellent work !! U give a wider perspective in a decent way! Thank yu! Jai hind

  10. mithles

    Before readind this article, i was not interested in economy but the way you have delt this Urjit I become intested, sochta hu, if I you had my mentor I would prefer to opt Economy for mains .You know how to teach, thanks.

  11. Arjun

    CPI is not released every 12 days , It is released on 12th of every month, providing provisional data for month preceding and confirmed data of the month preceding the said month.

  12. sunil

    Very nice explanation

  13. raghupurimetla

    awesome article sir, wonderful explanation thanq very much

  14. Amarnath

    Mrunalji thank you for a providing simple and useful articles.
    I have a doubt You are saying increase in REPO rate finally reduces prices of the commodities but what about the inelastic goods like food and fuel. you said in the post more than 50% weight-age in cpi given to food and fuel. plz clear my doubt. once again thanking you ji.

  15. Pranav Joshi

    Mrunal da please budget 2014 pe bhi articl post karo na, apne andaaz mein!!

  16. Shijoy Varughese

    Mrunal..CPI rural urban and combined were mentioned here.But does not India have 4 CPI s(UNME,QL,IW &RL)..Are they the same!

  17. SD

    keep going..u r guru…appreciate all ur explanations..

  18. SHOAIB


  19. SHOAIB


  20. avinash niraj

    very well sir…it is so lucid….

  21. vinn

    Cover fire!!

  22. Satyajeet Nayak

    In your answer for question No. 8, you have given option 2 as wrong.But in the theory portion, you have mentioned the option 2 also as a possible consequence.So, should not the answer for question 8 be all are correct?

  23. rahul

    Innovative way of making easy thing look boring …..

  24. Gourav Soni

    very nice article…mrunal sir….hats off to the way you made so many topics so interesting

  25. Raghubeer

    This article is really one of the very best of ur works Mrunal! Especially the Rajan line in the beginning had me floored! I have prelims in 2 days! Ahemmm… THanks a ton!!!

  26. Suneet

    sir bahut lamba article hai.. chakar aa rahai hain….

  27. deepa gupta

    awesome sir… rilly makes economics more intresting…:-)

  28. arul daniel

    could you explain financial sector legislative reforms commission sir,

  29. kumar

    Sir, I’ve a doubt. If inflation is because of structural problems of economy such as lack of cold chains, apmc act, food processing facilities etc.. how justified is to put interest rate higher which affects lending in industry and their invesment as well.

    1. Praveen_R

      You are correct RBI can’t control inflation due to supply side bottlenecks and the raising CAD. It just can keep the money off the shelf to keep the demand low and thus control the prices, but that takes a toll on the growth.

      That’s why Urjit suggested in his 3rd point –
      @Chindu, you give cover-fire to Rajan, while he is fighting inflation. [fiscal consolidation.]

  30. satya

    bhaiya charan kaha hain aapke?
    super duper awesome yaar!

  31. Praveen_R

    Hats of Mrunal…

    @Rajan, you fight inflation. [Nominal anchor, 4% CPI and everything]
    @Rajan, you fix accountability in your own gang. [form MPC Committee, decisions by voting etc.]
    @Chindu, you give cover-fire to Rajan, while he is fighting inflation. [fiscal consolidation.]

    never though UPSC preparation can also be so fun…

  32. Nikki

    Mrunal….the article is really superb,…..but i am unable to access part 2 of this article.

  33. unmesh

    It’s difficult to fight inflation

  34. Neha

    again thanksss sir…… very beautifully explained..!!!

  35. kanhaiya pachisia

    u r rock mrunal…..keep it up

  36. Gopal singh

    i really thnk to u mrunal for giving good conceptual clearty in economics topic……..thnk u…..keep it up

  37. anand

    Excellent content…very great work sirji…

  38. varun

    sir ji, cant put in words how grateful i am for ur posts…a million thanks…

  39. ashwini

    hi mrunal sir.. i v been helped a lot from this post…. not getting words to express my gratitude….

  40. neetu

    Thank you Sir, for such clarity on economy concepts.
    Please advise if it is necessary to buy IYB 2015 or would IYB 2014 be fine?

    Thank you sir.

  41. madhu

    wonderful article!….Thank You Very much..

  42. Fund Raiser

    I love this article – monpol in a very entertaining and remarkably clear written manner!
    Keep up the good work!

  43. g srikantj

    Very useful. Good work. Keep it up.

  44. Aaqib Javed

    Admin’s presentation is very cool… like the tapori way u referred people’s and other stuffs…. keep up the good work. ..
    All the best

  45. harshil kodia

    sir u are doing very great job for the students who can not afford coaching by providing your lecture and notes online.
    sir please keep it up. i will be very thankful to you.
    and sir please make the notes of the other subjects too.

  46. pankaj

    sir your work has epitomised the academic egalitarianism

  47. Ajay

    What is the answer of question 10???

  48. uma sharone

    Nice explanation

  49. tatvamasi

    reading this article again in 2016 because of swamys letter to pm about raghuram rajan….the extraordinary measures(high repo rate) taken by rajan makes him really look “hawkish” … because growth is not up to the mark now…job creation is all time low..i aint a macro economy professional but for me picture looks bleak…better if rbi focus on wpi(INCLUDING food and fuel)

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