Coicop 5 Ziffern Forex

Verwandte Nachrichten Die NBS veröffentlicht seine neuesten Statistiken. Das nigerianische Büro für Statistik. Dass der Verbraucherpreisindex (VPI), der die Inflation misst, im Juli 2013 um 8,7 Prozent (im Vergleich zum Vorjahr) gestiegen ist. Dies war um 0,3 Prozentpunkte höher als im Vergleichszeitraum von 8,4 Prozent Juni. Das Präsidium sagte, während Änderungen in der Überschrift Index blieben in einstelligen Ziffern für den siebten aufeinander folgenden Monat, stiegen die Preise höher als Folge der Zunahmen in allen zwölf Klassifizierung der einzelnen Verbrauch nach Zweck (COICOP) Divisionen. Es hob hervor, dass diese Zunahmen auch in den Zunahmen in den Nahrungsmittel - und Kernsubindizes gezeigt wurden. Der Core-Subindex verzeichnete im Vergleich zum Vorjahreszeitraum im Vergleich zum Vorjahr eine Veränderung von 1,4 Prozent im Januar. Nahrungsmittelpreise, wie vom Nahrungsmittelsubindex gezeigt, setzten fort, höher im Juli weiter zu steigen. Während der Markt begann, ein Rinnsal der neu geernteten Pflanzen zu beobachten, waren ihre Mengen nicht erheblich genug, um die Preise zu beeinflussen, sagte das Büro. 8220Die Preise stiegen im Juli von den im Juni verzeichneten Preisen leicht an. Im Juli stieg der Headline-Index um 0,54 Prozent, geringfügig niedriger als die 0,59 Prozent im Juni verzeichneten, 8221, sagte das Präsidium. Auf monatlicher Basis stiegen sowohl die urbanen als auch die ländlichen All-Item-Indizes an, wenngleich sie im Vergleich zu den im Juni verzeichneten Zinssätzen leicht gesunken waren. Der Index Urban All-Items stieg um 0,6 Prozent (verglichen mit 0,7 Prozent im Juni), während der Rural All Items Index um 0,5 Prozent leicht unter dem im Juni verzeichneten 0,54 Prozent lag. Die korrespondierende 12-Monats-Jahresdurchschnitts-prozentuale Veränderung für den Stadtindex betrug 11,4 Prozent, während der entsprechende ländliche Index mit 9,1 Prozent verbucht wurde. Beide Sätze waren niedriger als ihr jeweiliger Zwölfmonatsdurchschnitt für den Zeitraum bis Juni 2013. Der Composite Food Index erhöhte sich im Vergleich zum Vorjahr um 10,0 Prozent auf 148,4 Punkte im Juli. Das waren 0,4 Prozentpunkte höher als die im Juni verzeichneten 9,6 Prozent. Im Monatsvergleich stieg der Nahrungsmittel-Teilindex im Juli wie im Juni um 0,7 Prozent. 8220Bei Berichten über den Beginn der Ernten einiger Getreidearten, z. B. von Knollenknollen, bleiben die Auswirkungen auf die gesamten Lieferketten relativ vernachlässigbar, um den Verbrauchern durch die engen Vorräte eine erhebliche Erleichterung zu verleihen ", sagte das Präsidium. Im Juli wurden die höchsten Preiserhöhungen im Fleisch, in den Ölen und in den Fetten und in den Kartoffel-, Yams - und anderen Knollenklassen notiert. Die durchschnittliche jährliche Steigerungsrate des Lebensmittel-Teilindex für den im Juli 2013 endenden Zwölfmonatszeitraum betrug 10,2 Prozent gegenüber dem Vergleichszeitraum des Vorjahres um 0,2 Prozentpunkte niedriger als im 10-Monatsdurchschnitt Im Vergleich zum Vorjahreszeitraum. Auch im Juli stieg der Anteil aller Erzeugnisse oder der Kernindex, der die Preise für flüchtige Agrarerzeugnisse ausschloss, um 6,6 Prozent gegenüber dem Vorjahreswert von 5,5 Prozent im Juni um 1,1 Prozentpunkte. Der Core-Subindex lag monatlich bei 1,2 Prozent, eine Steigerung gegenüber der im Juni verzeichneten Rate um 0,9 Prozentpunkte. Der Anstieg des Core-Subindex nach Angaben des Präsidiums war auf Preiserhöhungen in verschiedenen Kategorien zurückzuführen, einschließlich tatsächlicher und unterstellter Mietpreise, flüssiger Brennstoffe (einschließlich Kerosin), feste Brennstoffe (einschließlich Brennholz und Kohle), Bekleidungsmaterialien und nicht haltbare Haushaltswaren. Energie, Möbelkosten drücken Inflationsrate auf 16,5 Von Mathias Okwe und Chuka Oditta (Abuja) 19 Juli 2016 4:37 Uhr Herr Odilim Enwegbara Expert fordert die Rückkehr zu hohen Einfuhrzoll Von der National Bureau Of Statistics (NBS) hat einen Bericht berichtet, dass die Inflationsrate im Juni auf 16,5 Prozent von den 15,6 Prozent im Mai aufgezeichnet bewegt. Dies ist das fünfte Mal wird die Wirtschaft wird Aufzeichnung zweistelligen Anstieg der Preise für Waren und Dienstleistungen seit Anfang des Jahres. Die NBS zugeschrieben den aktuellen Anstieg auf hohe Kosten in Strom, Kerosin, Möbel und Einrichtungsgegenstände sowie Straßenverkehr aufgezeichnet. Die Implikation der wenig über einem Prozent Anstieg der Inflationsrate ist der Wertverlust der Naira um denselben Prozentsatz oder die Zunahme der Warenpreise um dieselbe Marge. Inzwischen hat ein Entwicklungsökonom, Herr Odilim Enwegbara, die kontinuierliche Zunahme der Inflation, die auch als Verbraucherpreisindex bekannt ist, auf den Anstieg der eingeführten Waren aufgrund der inoffiziellen Abwertung der Naira durch die jüngste schwimmende Forex-Strategie verabschiedet Der Zentralbank von Nigeria. Um den Trend einzudämmen, befürwortete er die Zunahme des Einfuhrzolls der Länder, um die wachsende Einfuhr als eine Möglichkeit zur Förderung der lokalen Produktion zu überprüfen. Der Experte sagte: Wir sollten den derzeitigen Importabhängigkeitsdruck auf die Naira reduzieren. Es ist Zeit, zu hohen Einfuhrzölle zurückzukehren. Die hohen Kosten für die Geschäftstätigkeit in Nigeria, die sowohl lokale als auch ausländische Investoren in unserem verarbeitenden Gewerbe entmutigen, können nicht ohne massive Investitionen in kritische Infrastrukturen zusammen mit der Schaffung einer nationalen Entwicklungsbank, die einstellige Kredite zu kritischen realen Sektor gewährt kommen In einer Weise, die die aktuellen cutthroat Banken Zinsen umgehen. Wir müssen die Einfuhr von Dingen, die wir leicht vor Ort machen können, entmutigen. Wir benötigen eine spezielle Forex-Fenster, um es einfach für Importeure von kritischen Industrie-Eingänge, um leicht zugreifen können Forex. Die gegenwärtige Militanz im Niger-Delta, die die Ölproduktion und die Ölexporte reduziert hat, sollte von der Regierung dauerhaft gelöst werden, indem man die Beschwerden der Ölförderstaaten ernst nimmt. Auf diese Weise werden dringend benötigte Einnahmen aus Öl kommen. Die Mehrwertsteuer sollte dringend auf zwischen 20 und 30 auf Luxusgüter erhöht werden. Auf diese Weise kann die Regierung das Haushaltsdefizit 2016 finanzieren. Es ist nicht mehr verborgen, dass diejenigen, die unsere Geldpolitik, vor allem unsere Forex-Politik, gescheitert haben, jämmerlich in dem Ausmaß, dass es jetzt längst überfällig ist, in die Spitzenbank neues Blut zu injizieren. Nach dem Juni-Verbraucherpreisindex (CPI), der dem Guardian gestern zur Verfügung gestellt wurde, war die Juni-Inflationsrate höher als die Mairate, die bei 15,6 durch 0,9 Punkte stand. Die Inflation verzeichnete im Juni weiterhin einen relativ starken Anstieg im fünften Monat. Der Headline-Index stieg im Vergleich zum Vorjahreszeitraum um 16,5 Punkte an und lag damit um 0,9 Punkte höher als im Mai (15,6). Während die meisten COICOP-Divisionen, die zum Headline-Index beitrugen, schneller zunahmen, wurde der Anstieg jedoch belastet Durch einen langsameren Anstieg in drei Divisionen Erholung und Kultur, Restaurant und Hotels, und verschiedene Waren und Dienstleistungen, der Bericht ergab. Es zeigte sich auch, dass der Core-Index im Juni um 16,2 gestiegen ist, und zwar um rund 1,2 Punkte von den im Mai (15,1) verzeichneten Raten, auch wenn sich zeigte, dass im Juni die höchsten Zuwächse im Strom, , Möbel und Einrichtungsgegenstände, Personenbeförderung auf der Straße sowie Kraftstoffe und Schmierstoffe für persönliche Verkehrsmittel. Laut dem Bericht, während die importierten Nahrungsmittel in einem schnelleren Tempo weiter anstiegen, erhöhte sich der Nahrungssub-Index auf der Gesamtmenge, aber in einem langsameren Tempo im Juni relativ zu Mai. Das Präsidium sagte, dass der Index um 15,3 (im Vergleich zum Vorjahr) im Juni um 0,4 Punkte von den Zinssätzen im Mai erhöht. Der Index wurde durch eine langsamere Zunahme der Gemüse - und Zucker-, Marmelade-, Honig-, Schokoladen - und Süßigkeitengruppen gewichtet. Monatlich hat der Schlagzeilenindex seit dem Februar, der erste Monat von einem ausgeprägten Zunahme in seitwärts bewegt Preise in diesem Jahr. Insbesondere im Juni stieg der Index um 1,7, im Mai um rund 100 Basispunkte niedriger. Im Vergleich zum Vorjahr stiegen sowohl die städtischen als auch die ländlichen Indizes im Juni rascher an. Der Urban-Index stieg um etwa 100 Basispunkte von 17,1 im Mai auf 18,1 im Juni, während der Rural Index um 0,7 Punkte von 14,3 im Mai auf 15,1 im Juni stieg. Im Monatsvergleich stiegen sowohl die städtischen als auch die ländlichen Indizes im Juni langsamer. Der Urban-Index nahm im Laufe des Monats um 1,8 zu, um 120 Basispunkte niedriger von 3,0 im Mai. Darüber hinaus stieg der Ländliche Index im Juni um rund 1,6, im Mai um 90 Basispunkte niedriger als im Mai. Die prozentuale Veränderung des durchschnittlichen zusammengesetzten CPI für den zwölfmonatigen Zeitraum, der im Juni 2016 endet, über dem Durchschnitt des VPI für den vorangegangenen Zwölfmonatszeitraum war 11,4, höher von 10,7, der im Mai aufgezeichnet wurde. Die entsprechenden zwölfmonatigen jährlichen durchschnittlichen prozentualen Veränderung für den Urban-Index stieg von 11,2 im Mai auf 11,9 im Juni, während der entsprechende Rural-Index stieg auch von 10,4 im Mai auf 10,9 im Juni, sagte NBS. RBI Monetary Policy Framework ECOMRF210114F Bericht des Sachverständigenausschusses zur Überarbeitung und Stärkung des geldpolitischen Rahmens Januar 2014 Bericht des Sachverständigenausschusses zur Überarbeitung und Stärkung des geldpolitischen Rahmens Januar 2014 RESERVE BANK INDIA Mumbai 21 Bericht des Sachverständigenausschusses zur Überarbeitung und Stärkung des geldpolitischen Rahmens V Inhalt Seite Nr. I Einleitung 1 II Neubeginn der Wahl des Nominalankers für Indias Geldpolitik 4 III Organisationsstruktur, Rahmenbedingungen und Instrumente der Geldpolitik 23 IV Adressierung der Hindernisse bei der Übertragung der Geldpolitik 41 V Durchführung der Geldpolitik in einer globalisierten Umwelt 55 VI Empfehlungen 63 Anhang A. Memorandum 69 B. Konsultation Sitzung des Komitees mit Ökonomen / Analytikern 71 1. Untersuchung der Beziehung zwischen CPI-Combined und WPI 74 2. Korrelation zwischen Massnahmen der Inflation und Inflationserwartungen 76 3. Schätzung von Threshold Infl ation 78 4. Schätzung der Output Gap 81 Anhang Tabelle II.1 Nominal Anchors Vor - und Nachteile 83 II.2A Inflation Zielländer Fortgeschrittene Volkswirtschaften 85 II.2B Nichtinflation Zielländer Fortgeschrittene Volkswirtschaften 90 II.3 Inflation Targeting Länder Emerging Markets Economies 93 II.4A Einzelne Länder Inflationsziele 98 II.4B Nicht-inflationistische Zielländer 98 II.5 Zeithorizont zur Erreichung der Preisstabilität 99 II.6A Kommunikations - und Transparenzpraktiken in den Zielregionen 100 II.6B Kommunikations - und Transparenzpraktiken in Non-inflationion Targeting Countries 101 III.1 Geldpolitische Rahmenbedingungen - internationale Erfahrung 102 III.2 Länderübergreifende Liquiditätsoperationen und andere diskretionäre Operationen 104 III.3 Deregulierung der Zinssätze in Indien 106 III. 4 Geldbedarfsschätzungen 109 III.5 Zugang zu Liquidität im Rahmen von Refi nance-Einrichtungen 110 III.6 CPI-Combined 111 V.1 Maßnahmen zur Bewältigung der Auswirkungen des Taper-Gesprächs 112 V.2 Geldmengenermittlung zur Berücksichtigung von Wechselkursschwankungen 114 V.3 Counter Cyclical Prudential Regulation: Variationen von Risikogewichten und Bereitstellungsanforderungen 116 V.4 Kapitalsteuerungsmaßnahmen zur Anpassung der Börsenvolatilität 117 vi Abkürzungen Abkürzungen AEs Advanced Economies AUM Assets Under Management BI Bank Indonesien BIZ-Bank für Internationalen Zahlungsausgleich BPS Basis-Punkte BRICS Brasilien, Russland , Indien, China und Südafrika CAD Leistungskonto Defi cit CBRT Zentralbank der Republik Türkei CCBS Zentrum für Zentralbanken CCIL Clearing Corporation of India AG CDs Certificate of Deposits CEPR-Zentrum für wirtschaftspolitische Forschung CEPS Center for European Policy Studies CF Christiano-Fitzgerald CFM Kapitalflussmanagement CMBs Cash Management-Rechnungen CNB Tschechische Nationalbank COICOP Klassifikation des Individualverbrauchs nach Verwendungszweck CPI Verbraucherpreisindex CPI-AL Verbraucherpreisindex - Landwirtschaftsarbeiter CPI-IW Verbraucherpreisindex Industriearbeiter CPI-RL Verbraucher Preisindex-Rural Arbeiter CRR Cash Reserve Ratio DICGC Einlagensicherung und Kreditgarantie Corporation DMO Debt Management Officer DSGE Dynamic Stochastic Allgemeines Gleichgewicht EZB Europäische Zentralbank EMDEs Schwellen - und Entwicklungsländern EMEs Emerging Markets Economies EPFO ​​Mitarbeiter Provident Fund Organisation FIT Flexible Inflation Targeting FLS Finanzierung des Finanzierungssystems FMPs Feste Fälligkeitspläne FOMC Federal Open Market Committee FRBM Fiskalpolitik und Haushaltsführung FSLRC Finanzsektor Legislative Reforms Kommission GDP Bruttoinlandsprodukt GoI Regierung von Indien G-Secs Regierung Wertpapiere GST Waren und Dienstleistungen Steuern Harmonisierter Verbraucherpreisindex HVPI HP HodrickPrescott IWF Internationaler Währungsfonds IOF Imposto de Operacoes Finanzen IRF Zinssatz Futures IRS Zinssatz Swap IT Inflationsziel Targeting ITL Inflation Targeting Licht LAF Liquidity Adjustment Facility LCR Liquiditätsdeckungsgrad LIBOR London Inter Bank Angebotsrate LPG Liquide Petroleum Gas LTV Loan-to - Value MFIs Mikrofinanzierungsinstitute Bericht des Sachverständigenausschusses zur Überarbeitung und Stärkung des geldpolitischen Rahmens vii MGNREGA Mahatma Gandhi Nationales ländliches Beschäftigungsgarantiegesetz MIBOR Mumbai Interbank Angebotene Rate MPC Geldpolitik Ausschuss MPD Geldpolitik Abteilung MPMs Geldpolitische Sitzungen MSF Marginal Standing Fazilität MSPs Minimale Unterstützungspreise MSS Marktstabilisierungssystem NBP Nationalbank von Polen NCAER Nationaler Rat für Angewandte Wirtschaftsforschung NDS - OM Verhandlungssystem - Order Matching NDTL Netto-Nachfrage und Zeit Verbindlichkeiten NEER Nominaler effektiver Wechselkurs NKPC New Keynesian Phillips Kurve NMB Net Market Borrowing NSEIL National Stock Exchange of India Limited NSSO Nationale Stichprobenerhebung Offi ce OMOs Open Market Operations PDO Öffentliche Schuld Offi ce PDs Primärhändler PF Provident Fonds PPI Produzenten Preisindex QE Quantitative Erleichterung RBI Reserve Bank of India REER Wirklicher effektiver Wechselkurs RIBs Wiederaufbau Indien Bonds ROSCs Berichte über die Einhaltung von Standards und Codes SDLs Staatliche Entwicklungsdarlehen SFs Standing Facilities SHGs Selbsthilfegruppen SLR Gesetzliche Liquiditätsverhältnisse SNB Schweizerische Nationalbank TAC Technischer Beratungsausschuss TACMP Technischer Beratungsausschuss für die Geldpolitik TBs Treasury Bills TDS Steuer Abgezogen an Quelle UCM Unobserved Components Modell UMPs Unkonventionelle Geldpolitik WALR Gewichtete durchschnittliche Ausleihrate WEO Weltwirtschaftsausblick WPI Großhandelspreisindex Bericht des Sachverständigenausschusses zur Überarbeitung und Stärkung des geldpolitischen Rahmens 1 Kapitel I Einführung I.1 Das Verhalten der Geldpolitik hat grundlegende Veränderungen und Regimewechsel erfahren Vor allem in Reaktion auf die Herausforderungen und Chancen, die durch strukturelle Veränderungen in der Wirtschaftstätigkeit, aber auch durch die Finanzliberalisierung und ihre Ergebnisse ausgelöst wurden. Eine klarere Fokussierung auf die Preisstabilität als Haupt-, aber nicht notwendigerweise das einzige Ziel der Geldpolitik hat sich durch einen breiten Konsens entwickelt. Mit der Deregulierung der Finanzmärkte und der Globalisierung hat der Prozess der geldpolitischen Formulierung eine weitaus größere Marktorientierung als je zuvor erreicht. Dies wurde begleitet von institutionellen Veränderungen, auch wenn die Zentralbanken ihre operative Autonomie bei der Erreichung ihrer Ziele anstreben. I.2 Die globale Finanzkrise und ihre Folgen haben die Zentralbanken vor große Herausforderungen gestellt und ihre Mandate einer engen Überprüfung und Neubewertung angesichts einer beispiellosen finanziellen Instabilität unterworfen. In den fortgeschrittenen Volkswirtschaften (AEs) erfordert dies die Verwendung von unkonventionellen geldpolitischen Instrumenten, einschließlich Assetkäufen und Vorwärtsberatung. Im Falle der aufstrebenden Volkswirtschaften (EME) wurde das Verhalten der Geldpolitik unter anderem durch die systemischen Externalitäten im Zusammenhang mit der Geldpolitik der fortgeschrittenen Volkswirtschaften erschwert. Die Geldpolitik in den Schwellenländern musste daher nicht nur mit Angebotsschocks konfrontiert werden, sondern auch zur Bewältigung externer Schocks, die durch Schwankungen und Ebbe in den Kapitalströmen, die Volatilität der Wechselkurse und die Vermögenspreise ausgehen, und den Ausstieg aus ihren eigenen (allzu) . I.3 Im Rahmen des geldpolitischen Rahmens wurden mehrere Umwandlungen vorgenommen, die die makroökonomischen und finanziellen Rahmenbedingungen widerspiegeln. Insbesondere in den postfrischen globalen Krisenjah - ren hat sich der geldpolitische Rahmen, vor allem wegen der Koexistenz von anhaltend hoher Inflation und schleppendem Wachstum, intensiv diskutiert. I.4 Vor diesem Hintergrund stellte Gouverneur Dr. Raghuram G. Rajan in einer Erklärung nach der Amtsübernahme am 4. September 2013 fest, dass: Die primäre Rolle der Zentralbank, wie das RBI-Gesetz vorschlägt, ist die monetäre Stabilität, dh , Um das Vertrauen in den Wert des Landes Geld zu erhalten. Letztlich bedeutet dies niedrige und stabile Erwartungen an die Inflation, sei es, dass diese Inflation aus heimischen Quellen oder aus Änderungen des Wertes der Währung, aus Angebots - oder Nachfragedruck resultiert. Ich habe den stellvertretenden Gouverneur Urjit Patel aufgefordert, zusammen mit einem Gremium, das er aus externen Sachverständigen und RBI-Mitarbeitern zusammensetzt, Vorschläge für die drei Monate darüber zu machen, was getan werden muss, um unseren geldpolitischen Rahmen zu revidieren und zu stärken. Eine Reihe vergangener Ausschüsse, darunter auch die FSLRC, haben darauf geachtet und ihre Ansichten werden auch sorgfältig geprüft. I.5 Daher wurde am 12. September 2013 ein Sachverständigenausschuss zur Überarbeitung und Stärkung des geldpolitischen Rahmens eingesetzt. Das Hauptziel des Ausschusses ist es, zu empfehlen, was zu tun ist, um den derzeitigen geldpolitischen Rahmen zu revidieren und zu stärken Um sie unter anderem transparent und vorhersehbar zu machen. I.6 Der Ausschuss bestand aus: Vorsitzender: 1. Dr. Urjit R. Patel, stellvertretender Gouverneur, Reserve Bank of India Kapitel I Einleitung 2 Mitglieder: 2. Dr. PJ Nayak 3. Professor Chetan Ghate, Associate Professor, Economics and Planning 4. Prof. Dr. Peter J. Montiel, Professor für Wirtschaftswissenschaften, Williams College, USA 5. Dr. Sajjid Z. Chinoy, Chief Economist und Executive Director, JP Morgan 6. Dr. Rupa Nitsure, Chief Economist , Bank of Baroda 7. Dr. Gangadhar Darbha, Geschäftsführender Direktor, Nomura Securities 8. Shri Deepak Mohanty, Direktor der Reserve Bank of India Mitglied Sekretärin: 9. Dr. Michael Debabrata Patra, Hauptberater, Abteilung für Geldpolitik, Reserve Bank of Indien Das Sekretariat des Ausschusses umfasste Dr. Mridul Saggar, Direktor der Abteilung für Wirtschafts - und Politikforschung, Shri Sitikantha Pattanaik, Direktor, Abteilung für Geldpolitik, Dr. Praggya Das, Direktor, Abteilung für Geldpolitik und Dr. Abhiman Das, Direktor Für Statistik und Informationsmanagement. I.7 Das Mandat des Ausschusses lautete: 1. Überprüfung der Ziele und des Verhaltens der Geldpolitik in einem globalisierten und in hohem Maße miteinander verbundenen Umfeld. 2. Einen angemessenen nominellen Anker für die Durchführung der Geldpolitik zu empfehlen. 3. Überprüfung der Organisationsstruktur, des operativen Rahmens und der Instrumente der Geldpolitik, insbesondere des Mehrfachindikatoransatzes und des Liquiditätsmanagements, um die Vereinbarkeit mit der makroökonomischen und finanziellen Stabilität sowie die Marktentwicklung zu gewährleisten. 4. Ermittlung der ordnungspolitischen, steuerlichen und sonstigen Überleitungsmechanismen und Empfehlung von Maßnahmen und institutionellen Voraussetzungen zur Verbesserung der Übertragung der Finanzmarktsegmente und der breiteren Wirtschaft. 5. Die Empfehlungen der bisherigen Ausschüsse / Gruppen in Bezug auf alle vorstehenden Ausführungen sorgfältig zu prüfen. Der Ausschuss hat seine Arbeiten vom 26. September 2013 aufgenommen. Das Memorandum zur Ernennung des Ausschusses befindet sich in Anhang A. I.8 Der Ausschuss hat enorme Fortschritte bei Beratungen mit Experten / Ökonomen / Analysten erzielt (Anhang B). Hilfreiche Anmerkungen und Vorschläge wurden von Professor Anil Kashyap, Universität von Chicago und von Dr. Sujit Kapadia, Bank von England empfangen, die sehr geschätzt werden. Der Ausschuss profitierte auch von Gesprächen mit verschiedenen Beamten der Reserve Bank of India (RBI), darunter Shri Chandan Sinha, Principal Chief General Manager, Abteilung für Bankgeschäfte und Entwicklung Shri G. Mahalingam, Principal Chief General Manager Financial Markets Department Dr BK Bhoi, Berater, Geldpolitik Abteilung Shri Jeevan Kumar Khundrakpam, Direktor, Geldpolitik Abteilung Shri AK Mitra, Direktor, Abteilung für Geldpolitik und Shri J. B. Singh, Assistant Adviser, Abteilung für Geldpolitik. I.9 Der Ausschuss möchte für das Team von Ressourcenexperten, die die Arbeit der Ausschüsse unterstützt haben, eine Rekordbeurteilung vornehmen. Gezeichnet von der Abteilung für Geldpolitik, der Abteilung für Wirtschafts - und Politikforschung und der Abteilung Bericht des Sachverständigenausschusses zur Überarbeitung und Stärkung des geldpolitischen Rahmens 3 des Statistik - und Informationsmanagements, der Beiträge der Ressource Personen, dh Dr. Saibal Ghosh, Shri Sanjib Bordoloi, Dr. Saurabh Ghosh, Dr. Snehal Herwadkar, Shri SM Lokare, Shri Asischer Thomas George, Shri Rajesh Kavediya, Shri GV Nadhanael, Smt. Abhilasha und Shri Joice John sind dankbar anerkannt. Der Ausschuss würdigt die administrative Unterstützung von Smt. Indrani Banerjee, Shri P. B. Kulkarni und Shri M. Z. Rahman von der Abteilung für Geldpolitik und technische Unterstützung der Abteilung für Informationstechnologie. I.10 Der Ausschuss hatte sechs förmliche Sitzungen und mehrere informelle Treffen. I.11 Der Bericht ist in sechs Kapiteln gegliedert: Kapitel II behandelt die Wahl des nominellen Anker für die Indias-Geldpolitik. Kapitel III bewertet die Wirksamkeit und Transparenz der Organisationsstruktur, des operativen Rahmens und der Instrumente der Geldpolitik. Kapitel IV behandelt verschiedene Hindernisse für die Übertragung der Geldpolitik. Kapitel V behandelt das Verhalten der Geldpolitik in einem globalisierten Umfeld und Kapitel VI gibt eine Zusammenfassung der Empfehlungen des Ausschusses wieder. 4 Kapitel II Überarbeitung der Wahl des Nominalankers für Indias Geldpolitik Kapitel II Überarbeitung der Wahl des nominellen Anchors für Indias Geldpolitik 1. Einführung II.1. In den letzten Jahren war die Inflation in Indien unter den höchsten innerhalb der G-20. Die Haus - haltsinflationserwartungen sind stark gestiegen und blieben auf hohem Niveau, was von der niedrigen Inflationserfahrung 2000-2007 ebenso wie von der globalen Inflationsrate (Tabelle II.1) abhängt. Professionelle Prognostikstudien zeigen, dass die langfristigen Inflationserwartungen in diesem Zeitraum um rund 150 Basispunkte gestiegen sind (Charts II.1 und II.2). II.2. Die Konsequenzen können weitreichend sein. Erstens, bei hoher und anhaltender Inflation, sind die Realzinsen für die Sparer während der meisten der post-globalen Krisenperiode negativ, was zu einem Rückgang der inländischen finanziellen Ersparnisse führte. Zweitens, da die Indias-Inflation auf einem Niveau höher als das der Handelspartner fortbesteht, wird die externe Wettbewerbsfähigkeit erodiert. Wenn der nominale Wechselkurs zur Kompensation der Inflationsdifferenz passt, kann er eine Abschreibungsspirale auslösen und damit die makroökonomische Stabilität beeinträchtigen1. Drittens hat die große Nachfrage nach Gold als Absicherung gegen die Inflation den Rückgang der finanziellen Einsparungen verstärkt und zu einer Ausweitung des Leistungsbilanzdefizits (CAD) beigetragen, was die Wirtschaft anfällig für externe Schocks macht. Viertens hat die konsequente Abschwächung des Wechselkurses eine Balance auferlegt. 1 Der Balassa-Samuelson-Effekt impliziert, dass dieser Offset nicht eins zu eins sein muss, wenn das Produktivitätswachstum von Indias höher ist als in anderen Ländern. Tabelle II.1: Länderübergreifender Vergleich (Vorjahresvergleich) 2000-07 2008 2009 2010 2011 2012 2008-12 I. Globale Inflation (CPI) Welt 3,9 6,0 2,5 3,6 4,8 4,0 4,2 EME 6,7 9,2 5,3 5,9 7,1 6,1 6,7 BRICS (ohne Indien) Brasilien 7,3 5,7 4,9 5,0 6,6 5,4 5,5 Russland 14,2 14,1 11,7 6,9 8,4 5,1 9,2 China 1,7 5,9 -0,7 3,3 5,4 2,7 3,3 Südafrika 5,3 11,5 7,1 4,3 5,0 5,7 6,7 II. Inflation in Indien Konsumentenpreisindex Industriearbeiter 4,5 9,1 12,4 10,4 8,4 10,4 10,1 Großhandelspreisindex 5,2 8,1 3,8 9,6 8,9 7,4 7,5 Großhandelspreisindex - Food 3,8 8,9 14,6 11,1 7,2 9,3 10,2 Großhandelspreisindex Non Food Hergestellte Produkte 4,3 5,7 0,2 6,1 7,3 4.9 4.8 Hinweis: Die indische Inflation bezieht sich auf das Geschäftsjahr (April-März). Quelle: Weltwirtschaftsausblick, IWF RBI (für Indien). Bericht des Sachverständigenausschusses zur Überarbeitung und Stärkung der geldpolitischen Rahmenbedingungen 5 Bilanzrisiken für Kreditnehmer in Fremdwährung mit dem Potential für finanzielle Instabilität. Die fünfte, anhaltend hohe Inflation beeinträchtigt die gesamtwirtschaftliche Allokation und behindert das Wachstum2. Die sechste, hohe und anhaltende Inflation trägt zu einer Verschlechterung des Einkommens bei, da die Armen im Rahmen ihrer Ersparnisse einen überproportional höheren Kassenbestand nutzen. II.3. Ausgehend von den Lehren der globalen Finanzkrise gibt es international einen Konsens, dass sich die Geldpolitik von der engen Fokussierung auf die Inflation auf einen multiplen ziel-multiplen Instrumentenansatz verlagern sollte, ohne mittelfristig von einer Verpflichtung zur Preisstabilität abzuweichen. Dieser sich abzeichnende Konsens ist jedoch in erster Linie in Form einer Institutionalisierung der größeren Flexibilität in den vorherrschenden geldpolitischen Rahmenbedingungen und nicht in einer expliziten Regierungsüberholung zurückzuführen. Der Ausschuss erkennt das sich entwickelnde globale Denken zu diesem Thema an. Doch angesichts der anfänglichen Lage, die Indien gegenwärtig ausgesetzt ist, muss die Herabsetzung der Inflation Vorrang erhalten. Verankerte Inflationserwartungen bieten dann die Möglichkeit, andere Ziele ohne Kompromisse bei der Preisstabilität anzugehen. 2. Wahl des Nominalankers II.4. Ein transparenter und vorhersehbarer politischer Rahmen ist, nahezu defi - nition, regelbasiert. Zentral für einen glaubwürdigen Rahmen ist ein nominaler Anker. Ob fixiert oder bewegt, bindet sie mittel - bis langfristig das Ziel der Geldpolitik und / oder ihren Weg, und die Erwartungen der Wirtschaftsakteure passen sich dementsprechend an. Indem sie als Einschränkung der politischen Diskretion agiert, verzögert ein nomineller Anker die Zeitinkonsistenz3, auch unter dem Einfluss von Interessengruppen. II.5. Im Großen und Ganzen wurden drei Arten von Nominalankern aufgezeichnet, zumindest in der jüngsten Vergangenheit (Anhang Tabelle II.1). Der Wechselkurs, vermutlich der älteste und ein Beispiel für einen fixierten Anker in seiner ursprünglichen Form, steht heute vor einem abnehmenden Praktizierenden-Appell, da er einen Verlust der Unabhängigkeit der Geldpolitik bei der Verfolgung der nationalen Ziele mit sich bringt und die Wirtschaft externen Schocks aussetzt , Insbesondere solche, die von der Ankerwirtschaft ausgehen. Darüber hinaus würde die wachsende Volatilität der Inflation und die wachsende Abkehr der relativen Preise von den Werten, die allein die Marktpreise ausmachen, dazu beitragen, das Wirtschaftssystem weniger effizient zu machen, Reibungen in allen Märkten einzuführen und sehr wahrscheinlich die Arbeitslosenrate zu erhöhen (Friedman, 1977). Es gibt eine Nicht-Null-Inflationsrate, bei der die Arbeitslosigkeit am niedrigsten ist und die mit höherer oder niedrigerer Inflation zu einer höheren Arbeitslosenrate führt (Akerlof et al., 2000). Empirische Schätzungen aus einem Wachstumsrechnungsrahmen lassen vermuten, dass die Inflation das Wachstum durch eine Verringerung des Investitions - und Produktivitätswachstums reduziert (Fischer 1993). Dies findet sich auch in einem länderübergreifenden Rahmen (Barro 1995). George, AA Dickens, WT und GL Perry (2000): Niedrig-rationale Lohn - und Preisverhältnisse und die Long Run Phillips Curve, Brookings Papers on Economic Activity, 1, 1- 60. Barro, RJ (1995): Inflation und Economic Wachstum, NBER Working Paper 5326, October. Fischer, S. (1993): Die Rolle der makroökonomischen Faktoren im Wachstum, Journal of Monetary Economics, 32 (3), 485-512. Friedman, M. (1977): Nobel Vortrag: Inflation und Arbeitslosigkeit, Journal of Political Economy, 85 (3), 451-472. 3 Das Problem der Zeitinkonsistenz bezieht sich auf einen Agenten (zB eine Zentralbank), der eine bestimmte Aktion für einen zukünftigen Zeitpunkt ankündigt und die Aktion nicht implementiert, wenn dieser Zeitpunkt aufgrund einer Vorliebe für eine andere Aktion erreicht wird. Daher fehlt es an Konsistenz in der bevorzugten Vorgehensweise zu verschiedenen Zeitpunkten. Auch andere rationale Wirtschaftsakteure erwarten von dem ersten Agenten dieses Versprechen. 6 Kapitel II Revision der Wahl des Nominalankers für Indias Die Geldpolitik als Währungskrisen haben wiederholt gezeigt, dass ein Wechselkursanker den geldpolitischen Rahmen anfällig für spekulative Angriffe und konsequente finanzielle Instabilität macht. II.6 Monetäre Aggregate dienten auch als nominale Anker, wurden jedoch durch Instabilität und Verlust der Vorhersehbarkeit der Geldnachfrage unterminiert, indem sie die Rechenschaftspflicht und die Kommunikation vernachlässigten, wenn die Ziele verfehlt wurden. II.7. Seit den späten achtziger Jahren haben mehrere Länder die Inflation als nominellen Anker für die Geldpolitik angenommen und auf die starke theoretische und empirische Unterstützung für eine niedrige und stabile Inflation als notwendige Voraussetzung für ein nachhaltiges hohes Wachstum gestützt. II.8. Die explizite inländische Ausrichtung der Inflation wird als klarer Vorteil gegenüber anderen Kandidaten für den Nominalanker gesehen. Sie verfolgt die Geldpolitik, um Preisstabilität als eindeutiges und nachhaltiges Ziel zu erreichen, auf dem der Privatsektor seine Erwartungen über die zukünftige Inflation verankern kann. Die anderen Positiven, die mit der Inflation als Anker assoziiert sind, sind, dass sie einfach, leicht kommuniziert und daher auch von der breiten Öffentlichkeit gut verstanden werden. Durch die Förderung von niedrigen und stabilen Inflationserwartungen trägt sie zu einem wünschenswerten makroökonomischen Ergebnis bei. Die vielfältige Ländererfahrung mit der Inflationsrate (IT) deutet darauf hin, dass sie in Bezug auf eine verminderte Inflationsvolatilität (Svensson, 1997) signifikante Vorteile gebracht hat (Svensson, 1997), die Auswirkungen von Erschütterungen (Mishkin 2004) und die Verankerung der Inflationserwartungen (Kohn 2007) , Swanson, 2006, Levin et al., 2004). Dementsprechend haben IT-Frameworks eine zunehmende Akzeptanz unter den fortgeschrittenen und aufstrebenden Volkswirtschaften erreicht (Anhang-Tabellen II.2A und II.3). Dies hat die Vertiefung der institutionellen Architektur um sie herum katalysiert. II.9. Nachteilig ist, dass (a) ein Teil der Inflation, wie z. B. von Nahrungsmitteln und Treibstoffen, nicht leicht von der Geldpolitik kontrolliert wird, b) aufgrund der langen und variablen Verzögerungen bei der geldpolitischen Übertragung inhärent ein mittelfristiger Rahmen ist . Das Fehlen einer unmittelbaren Nachweisbarkeit der Ergebnisse kann zu einer zweideutigen Wahrnehmung der politischen Haltung führen. Ein weiteres Anliegen war die Instabilität der Produktion und der Beschäftigung, die durch die übergeordnete Betonung der Erreichung des Inflationsziels und die beobachtete Zunahme der Ausstoßverluste im Zusammenhang mit der Desinflation verursacht wurde. II.10. Beginnend mit Chile im Jahr 1991 hat die Zahl der EME (23), die die Inflationsziele als geldpolitisches Rahmenkonzept verabschiedet haben, die der AE (9) übertroffen. Most EMEs used infl ation targeting initially as a price stabilising device, with a sequence of annually declining inflation targets measured by headline consumer price index (CPI) which is perceived as well understood by the public and quickly available. These EMEs tended to move away from a one-year ahead inflation target to either multi-year targets or a medium-term target. Several countries in this category refer to their monetary policy framework as infl ation targeting light (ITL)5. There are some 38 countries that have not committed to any specifi c target among 4 Kohn, D. (2007): Success and Failure of Monetary Policy since the 1950s, Speech at Monetary Policy over Fifty Years, a conference to mark the fi ftieth anniversary of the Deutsche Bundesbank, Frankfurt, Germany. Levin, A. T. Natalucci, F. M. and J. M. Piger (2004): Th e Macroeconomic Eff ects of Infl ation Targeting, Federal Reserve Bank of St. Louis Review, 86(4), 51-80. Mishkin, F. (2004): Why the Federal Reserve Should Adopt Infl ation Targeting, International Finance, 7(1), 117-27. Svensson, L. E. O (1997): Infl ation Forecast Targeting: Implementing and Monitoring Infl ation Targets, European Economic Review, 41(6), 1111-1146. Swanson, E. (2006): Would an Infl ation Target Help Anchor U. S. Infl ation Expectations, FRBSF Economic Letter, (Aug 11). 5 The ITL countries choose not to adopt a fi xed exchange rate because it would leave them vulnerable to a speculative attack, Yet they do not become full-fl edged infl ation targeters because of constraints, such as the absence of a suffi ciently strong fi scal position. Often, ITL is used as a transitional approachaiming at maintaining monetary stability until the implementation of structural reforms in support of a single nominal anchor. Poland, for example, switched from monetary targeting to ITL before making the full transition to infl ation targeting. imf. org/external/pubs/ft/fandd/ basics/target. htm Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 7 EMEs, important examples in this category are Russia (to complete transition to an IT regime by 2015) and India. II.11. Finally, some monetary policy frameworks do not operate under an explicit nominal anchor, but such an anchor is implicit and the track record has been creditable6 (e. g. the US), with forward-looking behaviour triggering pre-emptive strikes against target warnings (Appendix Table II.2B). The main criticisms are the uncertainty in fi nancial markets on policy actions and herding of expectations strong dependence on individual skills and charisma of the monetary policy wielder and susceptibility to outside pressures. II.12. In spite of strong theoretical positions that monetary policy can only hope to affect nominal variables, and that in the long run, there is no trade - off between infl ation and employment, policy makers in some parts of the world have shown interest in bypassing nominal anchors and choosing targets from among real variables that have a direct bearing on growth and consumption. Real exchange rate targeting has been the most popular, but the experience has been that while monetary policy may be able to temporarily infl uence the real exchange rate, this can come at the cost of a combination of higher infl ation and higher real interest rates. Additionally, this runs the risk of losing the nominal anchor completely in the case of the real exchange rate target for instance, the rate of nominal appreciation/ depreciation becomes undetermined. The real interest rate has served as an anchor as well7. Here too, the experience has shown that infl ation can easily come unhinged since there is nothing to tie it down8. 3. The Indian Experience II.13. Indias monetary policy framework has undergone several transformations, reflecting underlying macroeconomic and fi nancial conditions as also the dominant socio-politico-economic paradigm. Drawing from the colonial past, the initial years following independence were characterised by an exchange rate anchor set by the proportional reserve system prescribed by the RBI Act where under at least 40 per cent of the total note issue was to be backed by gold bullion and sterling. The proportional reserve system gave way to the minimum reserve system in 1957 (only 2 billion worth of foreign securities and bullion needed to be maintained as a backing for currency issue, of which 1.15 billion had to be in gold) and the use of credit aggregates as the nominal anchor for monetary policy. Changes in the Bank Rate and the cash reserve ratio (CRR) were the main instruments of monetary policy supporting its explicit credit allocation role embodied in selective credit control, credit authorisation and social control measures to enhance the fl ow of credit to priority sectors. Setting the tone of monetary policy, the First Five Year Plan envisaged . judicious credit creation somewhat in anticipation of the increase in production and availability of genuine savings. II.14. During 1971-1985, the monetisation of the fi scal defi cit exerted a dominant infl uence on the conduct of monetary policy. The pre-emption of resources by the public sector and the resultant 6 The Federal Open Market Committee (FOMC) judges that infl ation at the rate of 2 per cent (as measured by the annual change in the price index for personal consumption expenditures) is most consistent over the longer run with the Federal Reserves mandate for price stability and maximum employmentThe FOMC implements monetary policy to help maintain an infl ation rate of 2 per cent over the medium term. federalreserve. gov/faqs/money12848.htm 7 In Chile, the interest rate on indexed bonds served as the real anchor during 1985 to 2001. 8 Other real variables such as output growth or unemployment cannot serve the purpose of credible real anchors since it is well established that monetary policy is neutral in the long run. The US, however, recently announced an explicit unemployment target to keep interest rates low till unemployment falls below 6.5 per cent. This is consistent with what monetary policy can do, i. e. to bring actual unemployment closer to the natural unemployment level or actual growth closer to the potential growth level. 8 Chapter II Revisiting the Choice of Nominal Anchor for Indias Monetary Policy infl ationary consequences of high public expenditure necessitated frequent recourse to the CRR to neutralise the secondary effects of the expansion. Financial repression in the form of interest rate prescriptions, statutory pre-emptions and directed credit partly crowded out the private sector from the credit market. Against this backdrop, the Committee to Review the Working of the Monetary System (Chairman: Dr. Sukhamoy Chakravarty) recommended in 1985 a new monetary policy framework based on monetary targeting with feedback, drawing on empirical evidence of a stable demand function for money. Thus, broad money became the intermediate target while reserve money was one of the main operating instruments for achieving control on broad money growth. The Committee had also emphasized that short-term interest rates could reinforce the anti - infl ationary impact of monetary targeting if they are also used as a monetary management tool in fi ghting infl ation. II.15. Analysis of the money growth outcomes during the monetary targeting regime indicates that targets were rarely met9. The biggest impediment to monetary targeting was lack of control over RBIs credit to the central government, which accounted for the bulk of reserve money creation10. Even with the CRR and the statutory liquidity ratio (SLR) raised to close to their statutory ceilings, money supply growth remained high and fuelled infl ation persistence at elevated levels. With the reforms introduced in 1991, capital flows became another factor that rendered control over monetary aggregates diffi cult. As the pace of trade and fi nancial liberalisation gained momentum in the 1990s, the effi cacy of broad money as an intermediate target was re-assessed. Financial innovations and external shocks emanating from swings in capital fl ows, volatility in the exchange rate and global business cycles imparted instability to the demand for money. There was also increasing evidence of changes in the underlying transmission mechanism of monetary policy with interest rate and the exchange rate gaining importance vis--vis quantity variables. II.16. The structural reforms and financial liberalisation in the 1990s also led to a shift in the fi nancing pattern for the government and commercial sectors, with interest rates and the exchange rate, increasingly market-determined. The RBI was able to move away from direct instruments to indirect market-based instruments. The CRR and SLR were brought down to 9.5 per cent and 25 per cent of NDTL of banks, respectively, by 1997. The RBI adopted a multiple indicator approach in April 1998 with a greater emphasis on rate channels for monetary policy formulation relative to quantity instruments11. Under this approach, which is currently in use, a number of quantity variables such as money, credit, output, trade, capital fl ows and fi scal position as well as rate variables such as rates of return in different markets, infl ation rate and exchange rate are analyzed for drawing monetary policy perspectives. The multiple indicator approach is informed by forward looking 9 Report on Currency and Finance, 2009-12, Reserve Bank of India. rbi. org. in/scripts/AnnualPublications. aspxheadReport20on20 Currency20and20Finance 10 The facility of ad hoc treasury bills led to automatic monetisation of the governments defi cit. Whenever the Government of India was in need of cash, it would issue non-marketable 91-day Treasury bills (TBs) to the RBI. This facility was phased out from April 1997. Besides, the Government of India also issued 91-day TBs on tap at a fi xed discount of 4.6 per cent per annum, that were mostly taken up by banks. Since the RBI rediscounted the tap TBs, it added to monetisation of fi scal defi cits and attenuation of monetary policy. 11 The RBI Annual Monetary Policy Statement (April 1998), while proposing the adoption of a multiple indicator approach, highlighted the challenges associated with the use of a single (a few) indicator(s), in particular monetary aggregates, monetary conditions index and interest rates. While fi nancial innovations were increasingly becoming a source of uncertainty for the assessment of money demand, information on price movements in fi nancial markets were not enough to construct a reliable measure of monetary conditions index, and the interest channel of transmission of monetary policy was still evolving. Against this backdrop, it was felt appropriate that a few key indicators may be used in conjunction with other indicators for purposes of policy making. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 9 indicators since the early 2000s drawn from the RBIs surveys of industrial outlook, credit conditions, capacity utilization, professional forecasters, infl ation expectations and consumer confidence. The RBI continues to give indicative projections of key monetary aggregates. II.17. The multiple indicator approach seemed to work fairly well from 1998-99 to 2008-09, as refl ected in an average real gross domestic product (GDP) growth rate of 7.1 per cent associated with average infl ation of about 5.5 per cent in terms of both the wholesale price index (WPI) and the CPI. In recent years, however, there has been mounting public censure of the effi cacy and even the credibility of this framework as persistently high inflation and weakening growth have come to co-exist. Using a large panel of indicators has been criticised as not providing a clearly defined nominal anchor for monetary policy12. It also leaves policy analysts unclear about what the RBI looks at while taking policy decisions. II.18. WPI and Consumer Price Index-Industrial Workers (CPI-IW) infl ation declined from 8.0 per cent and 8.8 per cent, respectively, in the monetary targeting regime (1985-86 to 1997-98), to 5.4 per cent and 5.6 per cent, respectively, during the fi rst decade of the multiple indicator regime (1998-99 to 2008-09). Thereafter, it rose to 7.2 per cent and 10.5 per cent, respectively, between April 2009 and November 2013. Since 2008, retail infl ation has trended up and has persisted at double digit levels over the last six years (Charts II.3 and II.4). In addition to supply side bottlenecks, there have been sharp increases in the minimum support prices (MSPs) since 2007-08 (Tables II.2 and II.3). 3.1. Recommendations of Earlier Committees II.19. Since 2007 several high level Committees in India have highlighted that the RBI must consider switching over to IT. II.20. The Report of the High Powered Expert Committee on Making Mumbai an International Rolling regression of univariate estimate of persistence Source: Computation of Patra et al 13 (2013), extended up to December 2013. 12 Mishra, A. and V. Mishra (2011): Infl ation Targeting in India: A Comparison with the Multiple Indicator Approach, Journal of Asian Economics, 23(1), 86-98. 13 Patra, M. D, Khundrakpam, J. and A. T. George (2013): Post-global Crisis Infl ation Dynamics in India, The Brookings Institution-NCAER, India Policy Forum, July. 10 Chapter II Revisiting the Choice of Nominal Anchor for Indias Monetary Policy Financial Centre, 2007 (Chairman: Percy S. Mistry) emphasised that the gold standard for a monetary policy framework is a transparent, independent, inflation-targeting central bank. With such an arrangement the Indian State would be: (a) underlining its commitment to delivering low and predictable infl ation and (b) inducing greater confi dence in the Rupee in the eyes of domestic and global investors. II.21. The Report of the Committee on Financial Sector Reforms, 2009 (Chairman: Raghuram G. Rajan) reiterated that the RBI can best serve the cause of growth by focusing on controlling inflation, and intervening in currency markets only to limit excessive volatility. This focus can also best serve the cause of inclusion because the poorer sections are least hedged against infl ation. The RBI should formally have a single objective to stay close to a low infl ation number, or within a range, in the medium term, and move steadily to a single instrument, the short-term interest rate (repo and reverse repo) to achieve it. II.22. The Financial Sector Legislative Reforms Commission (FSLRC), 2013 (Chairman: B. N. Srikrishna) also recommended that price stability is a desirable goal in its own right, particularly in India where inflation is known to hurt the poor and therefore the central bank must be given a quantitative monitorable objective by the Central Government for its monetary policy function. According to the Committee, the Ministry of Finance should put out Table II.2: Minimum Support Price for Foodgrains according to Crop Year (Y-o-y growth in per cent) Year Paddy Common Coarse Cereals Wheat Gram Arhar (Tur) Moong Urad 2000-01 4.1 7.2 5.2 8.4 8.6 8.6 8.6 2001-02 3.9 9.0 1.6 9.1 10.0 10.0 10.0 2002-03 0.0 0.0 0.0 1.7 0.0 0.8 0.8 2003-04 3.8 4.1 1.6 14.8 3.0 3.0 3.0 2004-05 1.8 2.0 1.6 1.8 2.2 2.9 2.9 2005-06 1.8 1.9 1.6 0.7 0.7 7.8 7.8 2006-07 1.8 2.9 15.4 0.7 0.7 0.0 0.0 2007-08 11.2 11.1 33.3 10.7 9.9 11.8 11.8 2008-09 39.5 40.0 8.0 8.1 29.0 48.2 48.2 2009-10 11.1 0.0 1.9 1.7 15.0 9.5 0.0 2010-11 0.0 4.8 6.4 19.3 52.2 33.0 34.9 2011-12 8.0 11.4 9.8 33.3 5.7 9.0 11.8 2012-13 15.7 19.9 5.1 7.1 4.1 10.0 13.2 2013-14 4.8 11.5 3.7 3.3 11.7 2.3 0.0 Source: Handbook of Statistics on Indian Economy, RBI Ministry of Agriculture, Government of India. Table II.3. Mean Infl ation Rates and Contribution to Overall Infl ation Year WPI Contribution to Infl ation in percentage points Food Items Non - food Articles Fuel Group and Minerals Non-food Manufacturing 1983-84 7.6 3.1 0.5 0.4 3.3 1984-85 6.4 1.2 0.5 0.5 4.6 1985-86 4.5 0.5 -0.1 0.9 4.2 1986-87 5.8 2.5 0.5 0.5 1.6 1987-88 8.2 2.3 0.9 0.2 4.3 1988-89 7.5 2.1 -0.1 0.4 6.4 1989-90 7.4 1.2 0.2 0.4 7.0 1990-91 10.3 2.8 0.7 1.1 5.3 1991-92 13.7 4.5 0.8 1.2 6.9 1992-93 10.0 2.9 0.0 1.2 7.1 1993-94 8.3 1.8 0.4 1.6 4.6 1994-95 12.6 3.7 1.0 1.0 7.5 1995-96 8.0 1.1 0.4 0.5 6.1 1996-97 4.6 2.0 0.0 1.1 0.8 1997-98 4.4 1.5 0.1 1.4 1.1 1998-99 5.9 2.8 0.5 0.4 1.7 1999-00 3.3 1.6 -0.3 1.0 1.8 2000-01 7.2 -0.8 0.1 3.4 2.9 2001-02 3.6 -0.1 0.2 1.3 1.3 2002-03 3.4 0.9 0.3 0.8 1.1 2003-04 5.5 1.6 0.5 1.0 2.7 2004-05 6.5 0.9 0.0 1.8 3.6 2005-06 4.4 0.9 -0.1 2.2 1.5 2006-07 6.6 1.9 0.2 1.4 3.1 2007-08 4.7 1.4 0.5 0.2 2.7 2008-09 8.1 2.2 0.5 2.2 3.1 2009-10 3.8 3.6 0.2 -0.1 0.1 2010-11 9.6 3.0 1.0 2.4 3.1 2011-12 8.9 2.0 0.5 2.9 3.6 2012-13 7.4 2.5 0.5 1.9 2.4 2013-14 (up to December) 6.2 2.9 0.3 1.7 1.2 Source: Patra, M. D. et al. (2013), extended up to December 2013-14. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 11 a statement defining a quantitative monitorable predominant target. Additional/subsidiary targets could also be specifi ed, which would be pursued when there are no diffi culties in meeting the predominant target. 3.2. Rationale for Flexible Infl ation Targeting in India II.23. Major central banks, in both advanced and emerging economies, have adopted fl exible infl ation targeting (FIT) under which the infl ation target is aimed to be achieved on average over the business cycle, while accommodating growth concerns in the short run (Ito, 2013).14 While FIT recognises the existence of the growth-infl ation trade-off in the short run, it is designed around the critical importance of price stability for sustainable growth in the medium run. The fl exibility under FIT, however, is not relevant for conditions where the inflation target is not achieved even over a full business cycle whether at any point of time or on an average i. e. high infl ation expectations exhibit far greater stickiness than infl ation despite sustained slowdown in growth and persistently high infl ation in itself becomes a risk to growth (please see footnote no. 2), which limits the space for accommodating growth concerns even in the short run. India, arguably, faces similar conditions in recent years and visible signs of stagflation i. e. high inflation co-existing with sluggish growth warrants a refocusing on the critical importance of price stability for improving overall macroeconomic stability in the near term, and for securing growth prospects in the medium run. As set out in Paragraph II.3, India is faced with the unique challenge of experiencing one of the highest infl ation rates among G-20 countries, with the level of infl ation expectations having doubled over the last four years. As enunciated earlier, elevated infl ation is creating macroeconomic vulnerabilities. In the light of these unique circumstances, the foremost and dominant objective of monetary policy must be to anchor infl ation expectations. A monetary policy framework with infl ation as the nominal anchor is also consistent with fl exibility in exchange rate management15. II.24. Stabi l is ing and anchoring inf lat ion expectations whether they are rational or adaptive is critical for ensuring price stability on an enduring basis, so that monetary policy re-establishes credibility visibly and transparently, that deviations from desirable levels of infl ation on a persistent basis will not be tolerated. In doing so, monetary policy provides a common set of expectations to all economic agents which, in turn, infl uences their behaviour and thereby aggregate demand. These dynamics can be captured within the framework of the New Keynesian macroeconomic model that is widely employed by modern central banks (Box II.1). Recommendations II.25. Drawing from the review of cross-country experience, the appraisal of Indias monetary policy against the test of outcomes and the recommendations made by previous committees, the Committee recommends that infl ation should be the nominal anchor for the monetary policy framework. This nominal anchor should be set by the RBI as its predominant objective of monetary policy in its policy statements. 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 centered around the nominal anchor. Subject to the establishment and achievement of the nominal anchor, monetary policy conduct should be consistent with a sustainable growth trajectory and fi nancial stability. 14 Ito, T (2013): We are All FIT-ers Now: Is Flexible Infl ation Targeting Fit to a New Financial Environment, Bank of Thailand and IMF Conference, November 1-2. 15 The RBI does not target a specifi c rate or level for the exchange rate. The RBI intervenes in the market only to smooth exchange rate volatility and prevent disruptions to macroeconomic stability. 12 Chapter II Revisiting the Choice of Nominal Anchor for Indias Monetary Policy The New Keynesian (NK) research programme is one of the most infl uential and prolifi c areas of research in monetary policy analysis. The framework provides the foundations of the NK DSGE (dynamic stochastic general equilibrium) model which is the workhorse model for the analysis of monetary policy at major central banks. DSGE models are based on optimising behaviour of households and fi rms, rational expectations, and market clearing, i. e. it adopts many of the tools associated with research on real business cycles. However, fi rms are modeled as monopolistic competitors, and nominal rigidities a key element of the model bring the main source of monetary policy non-neutrality (Gali, 2008a, 2008b Walsh, 2010 Sbordone et al. 2010). The simple NK model comprises three equations. The fi rst equation is called the New Keynesian Philips Curve (NKPC). This is the supply block of the model. This can be derived from the aggregation of price-setting decisions by fi rms, combined with an equation describing the relationship between marginal cost and the level of activity (see Gali 2008a, 2008b). It is given by: t Et kxt t, (1) where t is infl ation, xt is the output gap, Et is the expectation at time period t, and t is a cost-push shock. The second block relates the output gap positively to its expected one period value Et , and negatively to the interest rate gap (the difference between the real interest rate, it - Et and the natural rate of interest (rtn )). The equation is given by: xt - 1 (it Et rtn ) Et (2) Equation (2) is called the dynamic IS equation (DIS). The demand block exhibits a negative relationship between the real interest rate and real activity, since a rise in the real interest rate increases savings and lowers consumption (and investment). Both the NKPC and the DIS constitute the non - policy block of the New Keynesian model. Finally, the model is closed by a monetary policy rule. Monetary policy itself is often described by a central bank, which sets the short-term nominal interest rate according to a Taylor-type policy: it t yyt t (3) where it is the short-term nominal interest rate, t is a shock (an exogenous policy disturbance), and yt represents deviations of log output from its steady state value. The Box II.1: A Theoretical Framework as a Guide for Monetary Policy policy reaction function of the monetary authority closes the model allowing for a complete description of the relationship between the key variables: output, infl ation, and the nominal interest rate. Optimal Monetary Policy Woodford (2003) showed that the objectives of infl ation targeting can be approximated by a quadratic loss function consisting of the sum of the squares of infl ation deviations from target and a weight times the square of the output gap. The loss function associated with infl ation targeting is given by: (xt2 t2), (4) t0 where 0 denotes a central bank that is a strict infl ation targeter, and 0 denotes a central bank that is a fl exible infl ation targeter (i. e. also concerned about the stability of the economy). Flexible infl ation targeting refers to an optimal monetary policy that minimizes the central banks loss function (subject to equation (1)) by attaching a penalty to output gap fl uctuations. It can be shown that there are potential welfare gains to be made if the central bank conveys credibly the extent of its anti-inflationary stance (Svensson, 1997). Further, in the context of the simple NK model in equations (1), (2) and (3), the welfare comparisons will vary depending on the weight given to output stabilization. The general result is that the smallest welfare losses are obtained when monetary policy responds to changes in infl ation only. As Gali (2008b) points out, there are two direct costs of infl ation in this framework which justify why central banks should pursue a policy aimed at price stability. In the absence of cost-push shocks, infl ation becomes an indicator of an ineffi cient level of economic activity, because of the deviation of output from its natural level due to the presence of nominal rigidities. Infl ation also generates a more ineffi cient allocation of resources across fi rms and sectors, because not all fi rms can adjust their prices, which makes relative prices vary in accordance with fi rm or sectoral level shocks. This leads to sub-optimal goods being consumed and produced. Both considerations, and other practical considerations (such as the risk of hitting the zero lower bound on the nominal interest rate), suggest that a desirable policy is the attainment of a positive target for infl ation over a medium-term horizon. Also, because infl ation and the output gap are forward - (Contd. ) Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 13 II.26. This recommendation is intended to better ground infl ation expectations by making clear that infl ation is the RBIs primary objective and that it expects to be held accountable for its performance in this regard. 4. The Choice of Infl ation Metric in India 4.1 Range of Options II.27. Until recently, the RBI communicated indicative infl ation projections in terms of the WPI alone, essentially because it is the only measure of prices at a national level and CPIs have traditionally addressed prices facing specifi c sections of society. The three legacy consumer price indices CPI-IW, Consumer Price Index-Agricultural Labourers (CPI - AL) and Consumer Price Index-Rural Labourers (CPI - RL) capture the heterogeneity of the economic structure and the differences in the consumption basket across different population segments. Since October 2013, the RBI has started providing indicative projections of infl ation in terms of the broader CPI-Combined. While WPI weights are primarily based on production and traded values, the CPI-Combined weighting diagram is based on the National Sample Survey Offi ce (NSSO)s 2004-05 consumer expenditure survey. The RBI internally conducts infl ation analysis on the basis of a number of other indicators besides WPI/CPIs infl ation expectations yield spreads input and output prices in business expectations surveys and purchasing managers indices rural wages and corporate staff costs house prices and the like. II.28. The WPI is an imperfect substitute for a producer price index (PPI). Furthermore, it does not capture price movements in non-commodity producing sectors like services, which constitute close to two-thirds of economic activity in India. It also does not generally refl ect price movements in all wholesale markets as the price quotes of some of the important commodities like milk, LPG and the like are basically taken from retail markets. Movements in WPI often refl ect large external shocks. Moreover, it is often subject to large revisions for instance, between January 2010 and October 2013, WPI infl ation was looking variables, the analysis of monetary policy in the context of models with forward-looking variables points to the importance of a credible commitment to improve the central banks trade-offs. The NK framework can be used to evaluate the desirability of alternative monetary policy rules. It can also be used to determine the optimal monetary policy rule using welfare - based criterion. Because of its flexibility, it is able to incorporate a wide variety of country-specifi c characteristics of emerging market economies (commodity price shocks, formal-informal sector linkages), as well as other extensions (open economy features, credit frictions, etc.) for monetary policy analysis. References: 1. Gali, Jordi (2008a) Monetary Policy, Infl ation, and the Business Cycle: An Introduction to the New Keynesian Framework, Princeton University Press, New Jersey. 2. Gali, Jordi (2008b) The New Keynesian Approach to Monetary Policy Analysis: Lessons and New Directions, Economics Working Papers 1075, Department of Economics and Business, Universitat Pompeu Fabra, February 3. Ghate, Chetan, Pandey, Radhika and Ila Patnaik (2013) Has India Emerged Business Cycle Stylized Facts from a Transitioning Economy Structural Change and Economic Dynamics, Vol. 24(C), pp 157-172 4. Walsh, Carl E. (2010) Monetary Theory and Policy, Third Edition. MIT Press Books, The MIT Press. 5. Sbordone, Argia M. Tambalotti, Andrea, Rao, Krishna and Kieran Walsh (2010) Policy Analysis Using DSGE Models: An Introduction Economic Policy Review, Vol. 16, No. 2, October, pp 23-43. 6. Woodford, Michael (2003) Interest and Prices: Foundations of a Theory of Monetary Policy, Princeton University Press, New Jersey. 7. Svensson, Lars E. O. (1997) Optimal Infl ation Targets, Conservative Central Banks, and Linear Infl ation Contracts, American Economic Review, Vol. 87(1), pp 98-114. (Concld.) 14 Chapter II Revisiting the Choice of Nominal Anchor for Indias Monetary Policy 16 Moreno, R. (2009): Some Issues in Measuring and Tracking Prices in Emerging Market Economies, Chapter in Monetary Policy and the Measurement of Infl ation: Prices, Wages and Expectations, BIS Papers, 49, December, 13-51. 17 Bank of England (2013): Monetary Policy Trade-offs and Forward Guidance, available at bankofengland. co. uk/publications/Documents/ infl ationreport/2013/ir13augforwardguidance. pdf 18 See Annex 1 for causal relation between CPI and WPI for food and core components. revised 43 times out of which 36 times were in the upward direction. These revisions are made two months after the fi rst announcement, generating large uncertainty in the assessment of infl ation conditions. Conducting monetary policy based on provisional numbers generally entails the risk of under-estimating infl ationary pressures, especially when infl ation is rising. II.29. The true infl ation that consumers face is in the retail market. Although price indices that relate to consumer expenditures are at best imperfect, they are still close indicators of the cost of living. Almost all central banks in AEs and EMEs use CPI as their primary price indicator. Other price indicators like the national income price deflator are used as a secondary indicator16. The choice of CPI establishes trust viz. economic agents note that the monetary policy maker is targeting an index that is relevant for households and businesses17. The widespread use of the CPI as the major price indicator reflects its advantages it is familiar to large segments of the population and often used in both public and private sectors as a reference in the provision of government benefits or in wage contracts and negotiations. Importantly in India, unlike the WPI, the CPI is not subject to large revisions, which enhances its utility to the public and its usefulness for monetary policy purposes18. There is no revision in CPI-IW and in case of the CPI-Combined, revisions have so far been marginal. II.30. It is observed that the CPI-Combined has a strong and statistically signifi cant correlation with the CPI-IW, allowing the superimposition of the weighting pattern of the former on the price trends of the latter so as to generate a suffi ciently long time series for empirical assessment. The lag in the data release of the CPI-Combined is only 12 days as against one month for CPI-IW. The CPI-Combined and the CPI-IW also show similar infl ation momentum. Also, the CPI-Combined is empirically found to be robust in comparison with CPI-IW as far as price reporting is concerned. Accordingly, the argument that the CPI-Combined does not have adequate history to support data analysis is not by itself a limiting consideration. II.31. In India, food has 48 per cent weight in the CPI-Combined. If food and fuel and light are excluded in order to arrive at a core infl ation measure, 57.1 per cent of the consumption basket will be discarded. Also, two major energy components, viz. petrol and diesel, are part of transport and communication, which cannot be further segregated (as item level disaggregated price index is not available for the CPI-Combined). This also limits the estimation of CPI core infl ation based on statistical techniques other than exclusion. Furthermore, high infl ation in food and energy items is generally reflected in elevated infl ation expectations. With a lag, this gets manifested in the infl ation of other items, particularly services. Shocks to food infl ation and fuel infl ation also have a much larger and more persistent impact on infl ation expectations than shocks to non-food non-fuel infl ation. As such, any attempt to anchor infl ation expectations cannot ignore shocks to food and fuel. Furthermore, it is the headline CPI that households use to deflate nominal returns and therefore headline CPI informs their portfolio choice of fi nancial assets vis-a-vis other categories (like gold and real estate). Therefore, in spite of the argument made that a substantial part of CPI infl ation may not be in the ambit of monetary policy to control, the Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 15 The introduction of new CPIs in 2011, i. e. all India CPI - Combined, CPI-Rural and CPI-Urban provides for the fi rst time a nationwide retail price index in India that captures the infl ation faced by households, i. e. cost of living infl ation. The new CPIs have a comprehensive coverage across regions as well as commodity groups including services. With a base year of 2010, the new CPIs have a weighting pattern that refl ects more recent consumption patterns as compared with the other CPIs, as it is based on NSSOs 61st Round of Consumer Expenditure Survey data (2004-05). The CPI consumption basket will become up to date with its forthcoming revision based on weights from the NSS 68th round Consumer Expenditure Survey (2011-12). As per the latest NSSO survey, the weight of food in the consumption basket has gone down (from 55.0 per cent and 42.5 per cent respectively in the 2004-05 Round to 48.6 per cent and 38.5 per cent in the 2010-11 Round for rural and urban areas, as per the uniform reference period (URP) of last 30 days). The prices data collected from across India on a monthly basis by NSSO, Department of Posts as well as through web portals maintained by the National Informatics Centre, has contributed to improving the quality of data. At times, other measures of CPI have yielded similar infl ation as the new CPIs however, due to large differences in coverage and the weighting diagram (Table 1), comparison of new CPI and old CPIs (i. e. CPI-IW, CPI-AL and CPI-RL) at item level, is not directly feasible. While infl ation measured by CPI-Combined is the most representative among available measures of infl ation for households and therefore monetary policy, disaggregated information on weights and prices at the commodity level is not yet available. Public dissemination of disaggregated information is important for analysis and as a public good in itself. Availability of data on item level indices will also help in understanding the nature of price flexibility/ stickiness. Moreover, if the disaggregated information is also made available for sub-groups based on Classifi cation of Individual Consumption by Purpose (COICOP), it would facilitate cross-country comparison of price movements. Currently, the housing index for CPI-Urban includes different sub-samples for different months and the samples are Box II.2: CPI-Combined as a Representative Measure of Infl ation repeated only once in six months. Information on centres included in each sub-sample would be required to get a clearer idea of region specifi c movements in house prices and rent. The CPI-Combined is compiled based on aggregation of State-level CPIs using state-based weights to derive the all India Index. Considering the heterogeneous nature of price movements across different regions, the CPI-Combined infl ation could be susceptible to localised price pressures and volatility. Having indices based on national level weights at commodity level, to an extent, could mitigate this. More detailed information at the state level should also be made available in the public domain. Given that CPI captures end-user prices which include both central and state taxes, there could be price fl uctuations imparted by different tax structures across States. Currently, in the absence of a uniform GST, state level variations in tax policies and their contribution to the national infl ation would have to be carefully analysed to understand the infl ation dynamics. Some information on the tax component of prices at retail level, if compiled separately, could help in disentangling the effects of market driven price movements from the impact of changes in taxes on CPI. Currently services are largely captured within the Miscellaneous group. Even within the sub-group of miscellaneous, the baskets constitute a mix of goods and services. A separate service price index as a memo item would be desirable for analytical purposes. Table 1: Weight of Different Groups in the CPIs Items CPI - Urban CPI - IW CPI - Rural CPI - RL CPI - Combined Food and beverages 35.80 46.19 56.58 66.77 47.58 Pan, tobacco and intoxicants 1.35 2.27 2.73 3.7 2.13 Fuel and light 8.40 6.43 10.42 7.9 9.49 Housing 22.53 15.27 - - 9.77 Clothing, bedding and footwear 3.91 6.57 5.36 9.76 4.73 Miscellaneous 28.00 23.27 24.91 11.87 26.31 Note: CPI-Urban and CPI-Rural are the components of the new CPI - Combined exclusion of food and energy may not yield true measure of infl ation for conducting monetary policy. In these conditions, the CPI-Combined based headline infl ation measure appears to be the most feasible and appropriate measure of infl ation as the closest proxy of a true cost of living index for the conduct of monetary policy. Going forward, improvements in the index will be helpful to make the CPI-Combined a more robust and comprehensive measure of infl ation conditions (Box II.2). 16 Chapter II Revisiting the Choice of Nominal Anchor for Indias Monetary Policy 4.2 Rationale for the Choice of CPI II.32. In view of the long and variable lags characterising monetary policy, an appropriate infl ation indicator has to be forward-looking, tracking inflation expectations. A wide consensus in the theoretical and empirical literature has settled around the position that infl ation is driven by the output gap and by infl ation expectations (either backward or forward-looking) which infl uence wage and price setting behavior (as typifi ed in the New Keynesian Phillips Curve (NKPC)). The evidence forming in the post-2008 global fi nancial crisis period suggest that the role of infl ation expectations in shaping infl ation dynamics has become even more important. Illustratively, the level of slack in advanced economies should have imparted sustained deflationary pressures in this period instead, inflation has remained in the 2-3 per cent range because infl ation expectations were anchored at those levels by advanced economy central banks (IMF, 2013)19. More generally, over the last few decades the role of output gaps vis--vis infl ation expectations in infl uencing infl ation dynamics is observed to be secularly falling. II.33. A similar dynamic, albeit undesirable, may be currently playing out in India. Even as the Indian economy has experienced negative output gaps in 2013, CPI inflation excluding food and fuel has remained sticky at an elevated level, averaging above 8 per cent, and playing a growing role in determining wage and price behavior in India. The crucial question, therefore, is: what is driving household infl ation expectations in India An examination of the quantitative infl ation expectations of households in the RBIs survey shows that infl ation expectations tended to follow WPI infl ation during 2008-09. Post - 2011, however, they seem to be following CPI infl ation. Panel data analysis based on the RBIs urban households infl ation expectations survey shows that both three-month ahead and one-year ahead expectations are signifi cantly infl uenced by food as well as fuel infl ation measured from CPI-IW (Annex 2). This indicates the need to target headline CPI and not CPI excluding food and fuel to anchor infl ation expectations. Empirical evidence also suggests that: (a) changes in CPI-headline as well as CPI-food and fuel infl ation drive changes in infl ation expectations, and (b) increases in policy rates respond to rising infl ation expectations (details in Chapter-IV). II.34. Modeling infl ation as a function of its lag and forward-looking infl ation expectations along with the output gap in a Bayesian Vector Auto Regression (VAR) framework to account for the dynamic properties of each variable and the simultaneity properties shows that shocks to food and fuel infl ation within the CPI basket have the largest and most persistent impact on overall infl ation expectations. Specifi cally, a 100 basis points (bps) shock to food inflation immediately affects one-year forward expectations by as much as 50 bps and persists for 8 quarters. The persistence of the food infl ation shock on expectations reveals that either households perceive food shocks to be sustained and/or they expect food shocks will inevitably translate into a more generalized infl ation with a lag. Shocks to fuel infl ation also result in large changes in expectations but are less persistent, impacting one-year-ahead expectations up to four quarters. Interestingly, shocks to infl ation excluding food and fuel have a far more muted quantitative impact on expectations and persist for only two-three quarters. Shocks to WPI infl ation have no statistically signifi cant impact on infl ation expectations, indicating that targeting the WPI would do little to anchor inflation expectations. This analysis is robust to different estimations of output gaps and to the use of both three-month and one-year-ahead infl ation expectations (Box II.3). II.35. The results are intuitive because households experience food and fuel price changes on a daily basis but other prices change infrequently. The role of infl ation expectations cannot be ignored in the price formation process and, in fact, may have assumed greater importance than before. In particular, 19 IMF (2013): The Dog that Didnt Bark: Has Infl ation been Muzzled or was it Just Sleeping, Chapter 3, World Economic Outlook, April. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 17 the elevated and entrenched nature of expectations in India as measured by the RBIs households surveys is likely a key reason why elevated infl ation currently co-exists with negative output gaps. Consequently, the choice of the inflation metric cannot ignore food and fuel shocks and must, in fact, react to them to avoid a more generalized infl ation spiral that influences household expectations lastingly. Not a single EME infl ation-targeting central bank targets core CPI other than Thailand all of them target headline CPI. It is often argued that India is unique, with food and fuel infl ation constituting 57.1 per cent of the CPI basket and therefore outside the direct control of the RBI. In this context, however, it needs to be recognized that there are other EMEs that also have a relatively signifi cant fraction of food and fuel in the CPI basket (close to 40 per cent in the case of Indonesia and Brazil) but still choose to target headline CPI20. Accordingly, the Committee is of the view that in the current context, targeting headline CPI would be a critical prerequisite for reducing and then anchoring infl ation expectations. 20 The experience of both AEs and EMEs, in particular the UK, Israel, Brazil, Korea, and Indonesia suggests that food infl ation often deviates from the headline infl ation over a sustained period before converging to headline infl ation. Cross-country assessment suggests that food price shocks tend to have larger effects on headline infl ation in EMEs than in AEs. Moreover, since infl ation expectations are weakly anchored in EMEs, food price shocks have larger effects on infl ation expectations also. A striking fi nding is that EMEs operating with IT often exhibit better performance in managing medium-term infl ation expectations in response to food price shocks, almost mirroring the performance of AEs operating with IT, whereas EMEs that do not have IT seem to experience infl ation expectations fi ve years ahead rising in response to an adverse food price shock (IMF, WEO September 2011). 18 Chapter II Revisiting the Choice of Nominal Anchor for Indias Monetary Policy Recommendation II.36. The Committee recommends that the RBI should adopt the new CPI (combined) as the measure of the nominal anchor for policy communication. The nominal anchor should be defined in terms of headline CPI infl ation, which closely refl ects the cost of living and infl uences infl ation expectations relative to other available metrics. 5. Numerical Target and Precision II.37. A numerical infl ation target refl ects, explicitly or implicitly, the meaning of price stability in a country specifi c context. An explicit interpretation of inflation as an objective of monetary policy is exemplifi ed by the ECB which defi nes price stability as . a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2 per cent. An illustration of an implicit infl ation goal is that of China: Government announced to hold CPI infl ation in 2013 at 3.5 per cent, 0.5 percentage point lower than the target of last year. The cross country experience suggests that the numerical target should be a low but non-zero positive number. II.38. What should be the non-zero positive number for India Estimates using multivariate methods on quarterly data indicate that the level of CPI-Combined infl ation (all India back-casted using the CPI-IW) above which it is inimically harmful to growth is 6.2 per cent (Annex 3). Alternative methods of estimating the output gap (univariate and multivariate) suggest that the output gap was fairly close to zero during the period from Q3 of 2003-04 and Q1 of 2006-07 (Annex 4). During the same period, average CPI infl ation was at around 4 per cent. Admittedly, these estimates may not hold for a future regime that is centered around a clear nominal anchor (in other words, the past may not be a robust guide to the future a form of Lucas critique at play). Notwithstanding the limitations, these estimates provide, as a possible starting point, empirical support to a range of 4 to 6 per cent for the infl ation target. II.39. The choice of the exact numerical range or target for a country is also informed by infl ation in comparator EMEs and trading partners, consistent with its broader integration with the global economy. Country practices suggest that the target should be either less than or equal to the level of infl ation that may be consistent with minimum attainable non - inflationary rate of unemployment or maximum non-infl ationary rate of growth21. In the literature, there is a convergence of views that an infl ation rate of 1 to 3 per cent corresponds to price stability in AEs (since the Balassa-Samuelson effect would suggest higher inflation in emerging markets), while in transition economies infl ation in the range of 4 to 5 per cent would correspond to price stability22 (Appendix Table II.4A and B). Thus, the 1 to 3 per cent AE inflation range sets a lower bound, while an infl ation rate for India at around 6 per cent23 can be regarded as an upper bound. The key advantage of a range/band is that it allows monetary policy to do best what it can do, i. e. it remains sensitive to short run trade-offs between inflation and growth, but pursues the infl ation target on average over the course of a business cycle. Data limitations (ranging from 21 . For policy makers, our main message is that holding infl ation below 2 per cent or above 3.5 per cent likely entails signifi cant permanent losses in employment in either country (US and Canada) and that permanent unemployment will probably be minimized at some infl ation rate in the 2 to 3.5 per cent range. Taking into account the usual statistical uncertainty, we conclude that monetary policy can have a major lasting impact on prosperity, not by achieving full price stability, but by searching for the unemployment-minimizing infl ation rate in the range of 2 to 3.5 per cent.(Fortin, P. Akerlof, G. A. Dickens, W. T. and G. L. Perry (2002): Infl ation and Unemployment in the U. S. and Canada: A Common Framework, Brookings Institution UQAM Working Paper, 20/16, July). 22 Jonas, J. and F. S. Mishkin (2003): Infl ation targeting in transition countries: Experience and prospects, NBER Working Papers, w9667, nber. org/papers/w9667. 23 The estimate of 6 per cent infl ation as an upper bound is subject to the Lucas critique under an IT regime infl ation expectations can well be anchored at a lower level. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 19 large revisions to low quality of fi nal revised data), projection errors, and short run developments having a large impact on the near-term infl ation path such as failure of agricultural crops, high commodity prices, sharp depreciation in the exchange rate, higher taxes also warrant fl exibility through adoption of ranges/ bands. A band also provides lead information on maximum tolerance levels of monetary policy to accommodate unanticipated shocks, which enhances transparency and predictability. 5.1. Time Horizon for Attaining Price Stability II.40. Speed of disinfl ation is important for arriving at the appropriate time horizon over which the inflation target may have to be attained, but particularly important for a country aiming at adoption of fl exible infl ation targeting from a very high and persistent level of CPI infl ation. Speed also has to take into account the fact that prolonged high inflation itself imposes costs in the recent experience in India, these costs have entailed appreciating real effective exchange rate (REER), high CAD, fi nancial disintermediation (into gold), and resultant decline in fi nancial saving and investment that may have contributed to low growth. II.41. It is diffi cult to identify the optimal speed of disinfl ation. The time horizon should ideally refl ect the trade off long and variable lags (which may justify two to three years) versus credibility of the target (which may demand a shorter time horizon of about one year, since large deviations in the short run, despite the best communication, may not help in anchoring infl ation expectations)24 (Appendix Table II.5). While the Committee recognises that setting a relatively short time horizon can pose controllability problems (i. e. ability of a central bank to achieve the targets without large costs) and lead to loss of credibility if the target is missed, a time horizon of two years for achieving the inflation target is necessitated by the initial conditions in India and the serious macroeconomic consequences that they have entailed. A two-year time horizon should enable the performance of monetary policy to be easily verifi ed by the public, enhancing credibility. Recognising, however, that large output variations in a short time horizon should generally be avoided by monetary policy, it is pragmatic, on balance, to set multi-year targets that provide a lower medium-term target along with somewhat higher targets for the intermediate years (Box II.4). Recommendations II.42. The Committee recommends that the nominal anchor or target should be set at 4 per cent with a band of /- 2 per cent around it (a) in view of the vulnerability of the Indian economy to supply/ external shocks and the relatively large weight of food in the CPI and (b) the need to avoid a defl ation bias in the conduct of monetary policy. This target should be set in the frame of a two-year horizon that is consistent with the need to balance the output costs of disinfl ation against the speed of entrenchment of credibility in policy commitment. II.43. In view of the elevated level of current CPI infl ation and hardened infl ation expectations, supply constraints and weak output performance, the transition path to the target zone should be graduated to bringing down infl ation from the current level of 10 per cent to 8 per cent over a period not exceeding the next 12 months and 6 per cent over a period not exceeding the next 24 month period before formally adopting the recommended target of 4 per cent infl ation with a band of /- 2 per cent. The Committee is also of the view that this transition path should be clearly communicated to the public. 24 The control of infl ation is also imperfect because it is affected by unobservable shocks. Some deviation of infl ation from the target is unavoidable and does not mean that the price stability objective has been disregarded. 20 Chapter II Revisiting the Choice of Nominal Anchor for Indias Monetary Policy II.44 Since food and fuel account for more than 57 per cent of the CPI on which the direct infl uence of monetary policy is limited, the commitment to the nominal anchor would need to be demonstrated by timely monetary policy response to risks from second round effects and infl ation expectations in response to shocks to food and fuel. 5.2. Institutional Requirements II.45. While inflation is clearly a monetary phenomenon in the medium run, several non - monetary factors both domestic and external supply side and demand side can lead to signifi cant deviations from the target in the short run, which may also impact the medium-term path through persistence and unanchored infl ation expectations. It is necessary, therefore, that the adoption of fl exible inflation targeting is based on reasonably clear identifi cation of the pre-conditions. In India, building on the reputational bonus from adherence to fi scal targets in 2012-13, the Government must commit on a priority basis to a re-invigoration of the medium - term fi scal consolidation, as was pursued under the Fiscal Responsibility and Budget Management Since Indias CPI infl ation has persisted at a high level over successive years, the experience of countries such as Chile and Czechoslovakia could be particularly useful. The Central Bank of Chile adopted infl ation targeting in September 1990 when the countrys level of infl ation was over 25 per cent. It announced its fi rst annual infl ation target in a range of 15-20 per cent for 1991. The infl ation target for each successive year was set at a somewhat lower level than in the previous year. For example, the infl ation target range was revised down to 13-16 per cent for 1992. In 1995, however, it adopted a point target. The point target was also gradually lowered from 8 per cent in 1995 to 3.5 per cent in 2000. After reaching a reasonably steady-state infl ation rate in 1999, the Central Bank of Chile announced its infl ation target as 2 per cent with a tolerance band of 1 per cent point in either direction, to be achieved over the time horizon of 2 years. Chart 1 shows the cautious and gradual approach to adoption of a low infl ation target almost one decade of transition to explicit infl ation targeting. Box II.4: Glide Path for Infl ation Targets: Case Studies of Chile and Czech Republic The approach of CNB (Czech National Bank) is a classic example of how all range of options could be tried by a single country over time, recognising the challenge of adopting infl ation targeting from a high level of infl ation (Chart 2). The CNB switched to infl ation targeting in December 1997, by announcing a medium-term infl ation target for end - 2000 (of 3.5 - 5.5 per cent), but with higher targets of 5.5-6.5 per cent for end-1998, and 4-5 per cent for end-1999. In April 1999, it announced a long-term objective of 1-3 per cent range for end-2005. A band was announced, starting in January 2002, at 3-5 per cent and ending in December 2005 at 2-4 per cent. An infl ation target of 3 per cent with a tolerance band of one percentage point in either direction was announced for the period from January 2006. In March 2007, a new infl ation target of 2 per cent was announced (to become effective from January 2010). Currently the CNB strives to ensure that actual infl ation does not differ from the target by more than one percentage point on either side. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 21 (FRRBM) Act, 200325. The Committee is of the view that the goal of reducing the central government defi cit to 3 per cent of GDP by 2016-17 is necessary and achievable. Towards this objective, the Government must set a path of fi scal consolidation with zero or few escape clauses ideally this should be legislated and publicly communicated. The Report of the Committee on Roadmap for Fiscal Consolidation, 2012 (Chairman: Vijay L. Kelkar) already provides a path for the period up to 2014-1526. Furthermore, it may be important to identify and address other fi scal/ administrative sources of pressure on infl ation/drivers of infl ation persistence. For instance, the design of programmes like Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) provide a sustained upward push to nominal wages unrelated to productivity growth, and the National Food Security Act which could increase demand for foodgrains without corresponding efforts to augment supply. A policy induced wage-price/cost-price spiral can be damaging for the credibility of an infl ation targeting framework. The burden on monetary policy to compensate for these sources of infl ation pressure is correspondingly higher. II.46. The Committee recognises that excessive emphasis on pre-conditions may delay the adoption of fl exible infl ation targeting, and in fact, very few infl ation targeting countries achieved all the pre - conditions before formal adoption of the framework. Many infl ation targeting countries got instrument independence, achieved more transparency in terms of publication of inflation target/reports, and continued to manage the exchange rate after the switch over to infl ation targeting. Fiscal discipline generally turned out to be the biggest immediate advantage of formal adoption of infl ation targeting (Table II.4). Recommendations II.47. Consistent with the Fiscal Responsibility and Budget Management (Amendment) Rules, 2013, the Central Government needs to ensure that its fi scal defi cit as a ratio to GDP is brought down to 3.0 per cent by 2016-17. II.48. Administered setting of prices, wages and interest rates are signifi cant impediments to monetary policy transmission and achievement of the price stability objective, requiring a commitment from the Government towards their elimination. II.49. Finally, communication and transparency is important for any monetary policy framework, but more so for fl exible infl ation targeting (Appendix Table II.4: Fiscal Balances of Countries in the Year of Adopting Infl ation Targeting and in 2007 Country Year of Adopting Infl ation Targeting Fiscal Balance in the Year of Adopting Infl ation Targeting (Per cent of GDP) Fiscal Balance in 2007 (Per cent of GDP) Chile 1990 3.5 8.4 Israel 1990 -4.4 -0.2 Australia 1993 -3.9 1.5 Canada 1990 -4.9 1.6 Finland 1992 -8.1 5.2 New Zealand 1990 -1.7 2.5 Spain 1994 -4.9 1.9 Sweden 1992 -9.8 3.7 UK 1992 -7.2 -2.7 Brazil 1999 -6.9 -2.6 Czech Republic 1998 -1.6 -0.7 Poland 1999 -5.0 -1.9 South Africa 2000 -2.7 1.2 Thailand 2000 -2.2 0.2 Source: 1. IMF (2001) The Decline of Infl ation in Emerging Markets: Can it be Maintained, World Economic Outlook, Chapter 4, Table 4.5, May. 2. IMF (2010) Fiscal Exit: From Strategy to Implementation, Fiscal Monitor, Statistical Table 1, November. 25 The Parliament, in August 2003, voted for the FRBM Act (the bill was fi rst introduced in Parliament in December 2000). The Act was amended in July 2004, with the terminal date for achieving the numerical targets pertaining to fi scal indicators extended by one year to 2008-09 the annual targets for fi scal correction were specifi ed by Rules formed under the Act. 26 Report of the Committee on Roadmap for Fiscal Consolidation, 2012 (Chairman: Vijay L. Kelkar), Ministry of Finance, Government of India, September. 22 Chapter II Revisiting the Choice of Nominal Anchor for Indias Monetary Policy Tables II.6A and B). There are several factors that demand clearer communication on monetary policy. First, every democratic society requires public institutions that are accountable. The central bank must explain how it uses its monopoly power over money to attain the goals assigned to it by the elected government. Secondly, in a market economy, a central bank has to rely on fi nancial markets for transmission of its policies. It must, therefore, provide frequent assessments on macro-fi nancial conditions (credible 27 Cavoli, T. and Rajan, R. S. (2008): Open Economy Infl ation Targeting Arrangements and Monetary Policy Rules: Application to India, Indian Growth and Development Review, 1(2), 237-251. information for the markets) and clarify the intent of the policy stance. This is necessary for enhancing policy effectiveness and containing destabilising expectations. Frameworks with infl ation as a nominal anchor emphasise transparency in the form of public release of inflation reports, monetary policy committee minutes, projected infl ation path with fan charts and open letters to explain deviations from the infl ation target27. These aspects are addressed in Chapter III. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 23 Chapter III Organisational Structure, Operating Framework and Instruments of Monetary Policy 1. Introduction III.1. A central banks success depends on the quality of its decisions. Even with a clear target, suitable instruments and full insulation from outside pressures, a central bank cannot possibly foresee all contingencies. Eventually, its decision has to depend on judgment and, therefore, some discretion, which is best bounded by credible and transparent institutional accountability, is unavoidable. It is in this context that monetary policy decision-making has undergone a silent transformation1. The practice of Governor as the single decision-maker is being replaced by committees and no country has yet replaced a committee with a single decision-maker. The benefi ts attributed to a committee-based approach are: gathering more and better information pooling different conclusions, potentially reducing errors insurance against strong individual preferences and peer reviews promoting openness of interaction and independence. On the other hand, several costs have also been identifi ed: free riding (not contributing fully to decision-making) inertia (could be easily embedded in decisions tending to status quo even as a default option) and groupthink. Key to the implementation of the monetary policy decision, irrespective of whether it is taken collegially or by a single decision - maker, are: (a) an operating framework that enables the alignment of suitable instruments to fi nal goals (b) benchmarking the path set for policy instruments against rules developed through rigorous analysis of complex and fast changing macro dynamics, including structural macro models, dynamic stochastic general equilibrium (DSGE) models and Taylor rule type formulations (c) avoidance of perverse incentives, such as seeking to infl uence the gilt yield curve, inhibiting price discovery, impeding monetary transmission, and potentially creating a confl ict with the monetary authoritys primary objective and (d) sensitivity to fi nancial stability concerns. 2. Organisational Structure for Decision-making: The International Experience III.2. The organisational structure of the decision - making process in monetary policy varies across countries. Most central banks have adopted a committee approach for monetary policy decisions. Among major non-infl ation targeting central banks is the US, where the Board of Governors of the Fed is responsible for the discount rate and reserve requirements, while the Federal Open Market Committee (FOMC) is responsible for announcing the Fed Funds target rate. In Japan, the stance of monetary policy is decided by the Policy Board at Monetary Policy Meetings (MPMs). In China, the Monetary Policy Committee (MPC) is a consultative body, which has an advisory role in the context of comprehensive research on the macroeconomic situation and the macro targets set by the State Council, which is also entrusted with the monetary policy decision. III.3. The monetary policy decision-making process in inflation targeting countries can be broadly summarised as follows2: Most infl ation targeting central banks have an MPC which is involved with decision-making. 1 Blinder, A. (2004): The Quiet Revolution, Central Banking Goes Modern, Yale University Press. 2 This section draws heavily from State of the Art of Inflation Targeting 2012 CCBS Handbook No.29, Bank of England available at bankofengland. co. uk/education/Documents/ccbs/handbooks/pdf/ccbshb29.pdf accessed on October 24, 2013. This handbook reviewed practices prevailing in 27 infl ation targeting central banks. Chapter III Organisational Structure, Operating Framework and Instruments of Monetary Policy 24 The fi nal decision on monetary policy is taken by the board of central banks in many countries (thirteen) while in other (eleven) countries the decision is made by the MPC. There are also countries where the MPC makes recommendations to the board, which then takes the fi nal decision. The size and composition of committees vary across countries. The number of members range from five to ten. Among inflation targeting countries, about half have no external members in their MPCs. The Government does not have representation in the MPC in most countries (except in Colombia, Guatemala and the Philippines). Appointment of the members of the MPC is decided by the board of central banks or the central bank Governor in some countries (Israel, Serbia, South Africa) in others, they are appointed by the Government (UK, Poland, Mexico, Indonesia). Decision-making in MPCs is mostly by voting while about eight countries arrive at monetary policy decisions through a consensus. In 12 countries, the MPC meets every month, and most countries have MPC meetings at least bi-monthly. III.4. The major rationale for entrusting the task of monetary policy decision to a specialised committee appears to be that monetary policy formulation requires considerable knowledge and expertise on the subject domain. A committee also brings in participation from different stakeholders as well as diverse opinion which could help in improving the representativeness in the overall decision-making process. Collective wisdom of a group makes the whole somewhat greater than the sum of its parts because it does not simply mimic the views of (a) the average voter, (b) the median voter, and (c) the most skillful member (Blinder, 2008)3. This view is supported by experimental evidence (Blinder and Morgan, 2005)4 and a cross country assessment of performance of MPCs in about 40 countries (Maier, 2010)5. 2.1 Accountability III.5. Central bank accountability is the mechanism through which a system of checks and balances is established for the central bank in a democratic set - up. Formally, central banks are accountable to the Government or the Parliament, from where they derive their statutory authority. In practice, they are typically made accountable to legislative committees, ministers of finance, or supervisory boards. The choice of accountability mechanisms generally depends on the nature of the central banks responsibilities. The mechanisms used for easily observable and quantifi able objectives, such as price stability, are different from those for objectives that are hard to measure, such as fi nancial stability, or not easy to observe, such as the stewardship of resources (BIS, 2009)6. III.6. In some countries (e. g. New Zealand), the central bank Governor is legally the sole decision - maker, which makes it especially clear whom to hold 3 Blinder, A. (2008): Making Monetary Policy by Committee, CEPS Working paper No. 167, June. 4 Blinder A. and J. Morgan (2005): Are Two Heads Better than One An Experimental Analysis of Group versus Individual Decision-making, Journal of Money, Credit and Banking, 37(5). 5 Maier, P. (2010): How Central Banks Take Decisions: An Analysis of Monetary Policy Meetings in P. L. Siklos, M. T. Bohl M. E. Woher (eds), Challenges in Central Banking: The Current Institutional Environment and Forces Affecting Monetary Policy, Cambridge University Press, Cambridge. 6 BIS (2009): Issues in the Governance of Central Banks, A Report by the Central Bank Governance Group, May (Chap 7). Available on bis. org/publ/othp04.htm. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 25 responsible. In most other central banks, however, decisions are made by a board, committee or council, which gives rise to the issue of collective versus individual responsibility. There are several formal mechanisms through which central banks are held accountable for their activities: (i) monitoring by the government or legislature, (ii) publication of regular central bank reports, and (iii) tacit endorsement (the government or Parliament in about one-fifth of countries has explicit power to provide formal directives to the central bank, to override decisions or otherwise change the course of policy) (BIS, 2009). III.7. The vast majority of central banks have published targets (in particular, for monetary policy), but only a limited number about 20 per cent and mostly in industrialised countries are subject to formal procedures when targets are missed. Typically this involves additional reporting requirements to explain the reasons for missing the target as well as the measures and time frame needed to meet the target. Another potential remedial action is no reappointment or even dismissal. But, often, central bank offi cials can be dismissed only in cases of serious misconduct or incapacity and rarely because of poor performance. Most central banks, and nearly all in EMEs, are regularly monitored by their legislatures. In some countries, the relevant legislative bodies have addressed the problem of expertise by formally consulting external experts on monetary policy matters7 (BIS, 2009). 3. Organisational Structure for Monetary Policy Decisions in the RBI III.8. The responsibility, accountability and timing of decision-making relating to monetary policy remains with the Governor who is directly accountable to the Government of India. The RBI Act states that the Central Government shall appoint and remove the Governor and may give the RBI directions in the public interest8. III.9. Thus, in India, monetary policy decisions are made by the Governor alone. Indeed, quarterly policy statements are issued in the Governors name9. The process of monetary policy formulation in the RBI has, therefore, been traditionally internal. For policy formulation, the Governor is assisted by Deputy Governors, with one Deputy Governor specifi cally entrusted with the responsibility for monetary policy setting and conduct, and is guided by the inputs received from the Committee of the Central Board of Directors that meets every week to review monetary, economic and fi nancial conditions. III.10. Over time, the monetary policy formulation process has become more consultative and participative with an external orientation. Following the introduction of quarterly policy reviews (April/May, July, October and January) in 2005, the RBI set up a Technical Advisory Committee on Monetary Policy (TACMP) in July of the same year with external experts in the areas of monetary economics, central banking, fi nancial markets and public fi nance. The Committee is chaired by the Governor, with the Deputy Governor 7 An example of such an external agency is the International Monetary Fund (IMF), which usually comments on monetary policy in its regular Article IV consultations. The IMF also publishes Reports on the Observance of Standards and Codes (ROSCs) that summarise the extent to which certain internationally recognised standards and codes are observed in areas such as monetary and fi nancial policy transparency, banking supervision and payment systems. 8 the Reserve Bank of India is a statutory corporation constituted by the Act of 1934, which is wholly under the control of the Government of India. (G. P. Wahal versus Reserve Bank of India 1983, Lab. I.C.738 (All) (D. B) Reserve Bank of India versus S. Jayarajan (1996) 2 Lab. L.J.735 (SC). 9 Since 2010, the RBI instituted mid-quarter reviews (4 in number in June, September, December and March) in addition to quarterly policy reviews. The mid-quarter reviews are issued on the RBIs website as press releases. Chapter III Organisational Structure, Operating Framework and Instruments of Monetary Policy 26 in charge of monetary policy as the vice-chairman and the other Deputy Governors of the RBI as internal members. The Committee meets at least once in a quarter, reviews macroeconomic and monetary developments and advises the RBI on the appropriate stance of monetary policy. It also provides policy recommendations for mid-quarter reviews, which were introduced in 2010. The role of the TACMP is purely advisory in nature. Beginning with the meeting held in January 2011, the main points of discussions of the TACMP are placed in the public domain, with a lag of roughly four weeks after the meeting of the Committee. Members of TACMP have agreed not to speak in public on issues relating to monetary policy from ten days before the TACMP meeting up to one day after the policy announcement though members may express their views in public in other periods in their individual capacity. This shut period is a self - imposed discipline. III.11. With effect from October 2005, the RBI introduced pre-policy consultation meetings with representatives of different segments of the banking sector, trade and industry bodies, fi nancial market participants, credit rating agencies and other institutions. Since 2009, the RBI has also been holding consultations with senior economists and market analysts twice a year in the run up to the annual policy and the second quarter review. III.12. To bring in transparency in the process of policy formation, the RBI places in public domain all data/inputs that go into the formulation of monetary policy its internal macroeconomic assessment and results of surveys10 in the form of a report entitled Macroeconomic and Monetary Developments. 3.1 RBIs Accountability III.13. The Reserve Bank of India Act does not prescribe any formal mechanism for accountability. Over the years, however, certain practices for accountability have evolved. The RBI sets the rationale of its policies and indicates possible expected outcomes. The Governor holds a regular media conference after every quarterly policy review which is an open house for questions, not just related to monetary policy, but the entire domain of activities of the RBI. The RBI also assists the Finance Minister in answering Parliament questions relating to its domain. Most importantly, the Governor appears before the Parliaments Standing Committee on Finance whenever summoned, which happens on an average three to four times a year (Subbarao, 2013)11. III.14. The Financial Sector Legislative Reforms Commission (FSLRC) makes a strong case for monetary policy independence with accountability and recommends that independence needs to be accompanied by legal and administrative processes that clearly delineate the functioning of the regulator from the rest of the Government. Outlining the parameters of accountability, the FSLRC specifi es that in the event of a failure (to be defi ned clearly), the head of the central bank would have to: (a) write a document explaining the reasons for these failures (b) propose a programme of action (c) demonstrate how this programme addresses the problems that have hindered the achievement of the target(s) and (d) specify a time horizon over which the MPC expects the target to be achieved. A further check is envisaged in the form of a reserve power granted to the Central Government to issue directions to the central bank on issues of monetary policy under certain extreme 10 Industrial outlook order book, inventory and capacity utilization infl ation expectations credit conditions consumer confi dence corporate performance and professional forecasters assessments. 11 Subbarao, D (2013): Five Years of Leading the Reserve Bank - Looking Ahead by Looking Back, Tenth Nani A. Palkhivala Memorial Lecture delivered in Mumbai on August 29. Available on rbi. org. in Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 27 circumstances. Given the drastic nature of this power, any direction under this power must be approved by both Houses of Parliament and can be in force only for a period of three months. Such direction may be issued in consultation with the head of the central bank. 3.2 Recommendations of Earlier Committees on MPC III.15. Several committees have recommended formation of a full-fl edged monetary policy committee (MPC). The Standing Committee on International Standards and Codes, 2002 (Chairman: Dr. Y. V. Reddy) recommended legislative changes in the RBI Act so as to facilitate a mechanism for effective monetary policy. It recommended setting up of a Monetary Policy Committee on the lines of the Board of Financial Supervision. III.16. The Committee on Fuller Capital Account Convertibility, 2006 (Chairman: Shri S. S. Tarapore) recommended that there should be a formal Monetary Policy Committee. It also recommended that at some appropriate stage, a summary of the minutes of the Monetary Policy Committee should be put in the public domain with a suitable lag. III.17. The Committee on Financial Sector Reforms, 2009 (Chairman: Dr. Raghuram G. Rajan) recommended that a Monetary Policy Committee should take a more active role in guiding monetary policy actions. It should meet more regularly its recommendations and policy judgments should be made public with minimal delays. III.18. The Committee on Financial Sector Assessment, 2009 (Chairman: Dr. Rakesh Mohan) counseled on the need for strengthening the role of the TACMP and recommended that practices/ procedures towards this goal be considered as it gains more experience. III.19. The FSLRC, 2013 (Chairman: Shri B. N. Srikrishna) has recommended that. An executive MPC should be constituted that would meet on a fi xed schedule and vote to determine the course of monetary policy. Once the MPC has determined the policy action, the central bank would establish an operating procedure through which the operating target would be achieved. There should be clear accountability mechanisms through which the central bank would be held accountable for delivering on the objectives that have been established for it. III.20. While the FSLRC elaborated specifi c aspects of the decision-making process and accountability mechanisms, it was of the view that other critical elements measurement and research, operating procedure, and monetary policy transmission would take place through the management process of the central bank, with oversight of the board. 3.3 Rationale for the Committees Recommendation III.21. Heightened public interest and scrutiny of monetary policy decisions and outcomes has propelled a world-wide movement towards a committee based approach to decision-making with a view to bringing in greater transparency and accountability. In India, the institution of a sole monetary policy decision-maker embodied in the Governor has served well in establishing credibility since 2005, however, there has also been movement towards greater consultation with all stakeholders leading up to the setting up of the TACMP. With the publication of the minutes of the TACMP meetings since February 2011, there has been keen public interest in the views expressed in these meetings particularly when the actual monetary policy decision has not reflected the majority view attesting to greater appreciation of diversity of view points, independence of opinion and the fl avour of specialized experience that TACMP members have brought to these deliberations. In order to make Chapter III Organisational Structure, Operating Framework and Instruments of Monetary Policy 28 monetary policy processes more transparent and predictable, the Committee is of the view that this consultative process of monetary policy making should be carried forward to its logical conclusion and formalized into a decision-making process in preference over the purely advisory role of the TACMP. This should bring in a greater sense of involvement and ownership, as well as accountability. Several committees in India have also recommended a formalized committee approach to monetary policy decision-making. Recommendations III.22. Drawing on international experience, the evolving organizational structure in the context of the specifi cs of the Indian situation and the views of earlier committees, the Committee is of the view that monetary policy decision-making should be vested in a monetary policy committee (MPC). III.23. The Governor of the RBI will be the Chairman of the MPC, the Deputy Governor in charge of monetary policy will be the Vice Chairman, and the Executive Director in charge of monetary policy will be a member. Two other members will be external, to be decided by the Chairman and Vice Chairman on the basis of demonstrated expertise and experience in monetary economics, macroeconomics, central banking, fi nancial markets, public fi nance and related areas. III.24. External members will be full time with access to information/analysis generated within the RBI and cannot hold any offi ce of profi t, or undertake any activity that is seen as amounting to conflict of interest with the working of the MPC. The term of office of the MPC will ordinarily be three years, without prospect of renewal. III.25. Each member of the MPC will have one vote with the outcome determined by majority voting, which has to be exercised without abstaining. Minutes of the proceedings of the MPC will be released with a lag of two weeks from the date of the meeting. III.26. In view of the frequency of data availability and the process of revisions in provisional data, the MPC will ordinarily meet once every two months, although it should retain the discretion to meet and recommend policy decisions outside the policy review cycle. III.27. The RBI will also place a bi-annual infl ation report in the public domain, drawing on the experience gained with the publication of the document on Macroeconomic and Monetary Developments. The Infl ation Report will essentially review the analysis presented to the MPC to inform its deliberations. III.28. The Chairman, or in his absence the Vice Chairman, shall exercise a casting vote in situations arising on account of unforeseen exigencies necessitating the absence of a member for the MPC meeting in which voting is equally divided. III.29. The MPC will be accountable for failure to establish and achieve the nominal anchor. Failure is defi ned as the inability to achieve the infl ation target of 4 per cent (/- 2 per cent) for three successive quarters. Such failure will require the MPC to issue a public statement, signed by each member, stating the reason(s) for failure, remedial actions proposed and the likely period of time over which infl ation will return to the centre of the infl ation target zone. III.30. With the establishment of the MPC, there would be a need to upgrade and expand analytical inputs into the decision-making process through pre - policy briefs for MPC members, structured presentations on key macroeconomic variables and forecasts, simulations of suites of macroeconometric models as described in Chapter II, forward looking surveys and a dedicated secretariat. This will require restructuring and scaling-up of the monetary policy department (MPD) in terms of skills, technology and management information systems, and its reorganization. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 29 4. International Experience Operating Targets, Instruments and Liquidity Management 4.1 Operating Framework of Monetary policy III.31. The operating framework is all about implementation of monetary policy. It primarily involves three major aspects choosing the operating target choosing the intermediate target and choosing the policy instruments. The operating target pertains to the variable that monetary policy can directly control with its actions. The tool(s) with which the central bank seeks to impact the operating target is (are) the monetary policy instrument(s). The intermediate target is a variable which the central bank can hope to infl uence to a reasonable degree through the operating target and which displays a predictable and stable relationship with the goal variable(s). With growing instability in the relationship between the intermediate targets and the ultimate policy variables, intermediate targets have tended to be downgraded in monetary policy regimes of most central banks, although they are monitored as indicators/guides for their information content. The key challenge for the liquidity desk in the central bank is to use a combination of standing facilities, open market operations (OMOs) and reserve requirements to achieve the operating target on a day to day basis, and thereby ensure the fi rst leg of monetary policy transmission. Assessment of liquidity to arrive at the OMO volume (i. e. repo and outright taken together) that can ensure achievement of the operating target is therefore critical, but remains a challenge for every central bank. III.32. The current norm across central banks of AEs and EMEs is to have a short-term interest rate as the operating target, while using liquidity management instruments to modulate the liquidity conditions suitably so as to control the operating target (Appendix Table III.1). In the US, the operating target of monetary policy is the Federal Funds rate the rate at which banks trade balances at the Federal Reserve. Similar to the US, Australia sets a target for the cash rate the rate at which banks borrow from and lend to each other on an overnight, unsecured basis. Australia, however, regards the cash rate as its main instrument of monetary policy. The cash rate is determined by the demand and supply of exchange settlement balances that commercial banks hold at the Reserve Bank of Australia. Through its open market operations, the Reserve Bank of Australia alters the volume of these balances so as to keep the cash rate as close as possible to its target. Similar systems prevail in Canada, New Zealand, Norway and Indonesia. New Zealand adopted the offi cial cash rate as an instrument of monetary policy in 1999 prior to that, the instruments used to control inflation included infl uencing the supply of money and signaling desired monetary conditions to the fi nancial markets via a Monetary Conditions Index. These mechanisms were, however, indirect and hazy for the markets, and were eventually abandoned. In order to determine how much liquidity should be absorbed or made available to maintain supply and demand equilibrium in bank balances, Bank Indonesia sets targets for monetary operations each day. Since October 2008, it makes announcements of banking liquidity conditions twice daily, covering both total liquidity projection and excess reserves projection. In the UK, the main instrument of monetary policy is the Bank Rate (the interest rate at which money is lent to fi nancial institutions). The main operational target for the Riksbank is the overnight rate which it infl uences by instruments such as standing facilities and fi ne-tuning operations. The repo rate is the Riksbanks key policy signaling rate and a forecast path for the repo rate is given. III.33. Among countries that have an operating target based on a market rate of interest, the Swiss National Bank (SNB) sets a target range for the three-month Swiss Franc Libor. There are two main monetary Chapter III Organisational Structure, Operating Framework and Instruments of Monetary Policy 30 policy instruments open market operations (the SNB takes the initiative in the transactions) and standing facilities (SNB merely specifi es the conditions at which counterparties can obtain liquidity). III.34. Even though the short-term interest rate remains the main operating target for most central banks, the Bank of Japan switched its operating target from the uncollateralized overnight call rate to the monetary base in April 2013. It conducts money market operations with the explicit objective of expanding the monetary base at the rate of 60-70 trillion yen annually. China uses the growth rates of monetary aggregates as intermediate targets and typically employs several instruments in the implementation of its monetary policyexchange rate, required reserve ratio, interest rates, and open market operations12. III.35. An analysis of 170 economies showed that, despite the post-global fi nancial crisis scrutiny of monetary policy regimes, there have not been too many instances of regime overhauls, and explicit nominal anchors either in the form of fi xed exchange rates or infl ation targets have been persevered with. The nature of operations, though, has changed from primary dependence on conventional measures to extensive use of non-conventional measures, but non-conventional measures only justify the need for fl exibility in operations, rather than any change in the operating framework meant for normal times13. 4.2 Liquidity Management III.36. Liquidity management is key to the operating framework as it (i) ensures controllability of the reserve target (ii) ensures the fi rst leg of monetary policy transmission by anchoring the short-term money market rates to the policy rate target and (iii) prevents disruptions in payment and settlement, especially for liquidity defi cit systems. In view of the market frictions that could arise from institution - specifi c and systemic funding liquidity problems and their interdependence, all central banks attempt to institutionalise a sound liquidity management framework. The specifi c institutional setup, however, varies to a great deal across countries in terms of maturity and frequency of operations, counterparty arrangements, and eligible collateral (Appendix Table III.2). Liquidity management frameworks typically involve maximum accommodation with ample discretionary provisions, particularly when short-term interest rates serve as the operating target. III.37. Standing facilities (SFs) are transparent, available to banks and other counter parties without discretionary hurdles, and are generally considered as the safety valve of a liquidity management system. Virtually all central banks have a standing credit facility which extends funds to the defi cit counterparty at a penal rate (e. g. marginal lending facility of the ECB, primary and secondary credit facilities of the Fed). Eligible collaterals and tenor of borrowings, however, vary across countries. The standing deposit facility, though less in use, helps to defi ne a fl oor rate in the inter-bank market, especially in liquidity surplus conditions. The main advantage of a SF is that it gives the central bank a window to intervene in both directions, when needed, to achieve the operating interest rate target, with volatility in inter - bank rates restricted to the corridor. Reducing the volatility in the inter-bank money market rate while achieving the interest rate target is both an objective and also a challenge for effi cient liquidity management. There is evidence of asymmetric credit and deposit SFs in some countries. III.38. In addition to SFs, discretionary operations of a central bank could be classifi ed under two broad heads, viz. (a) the main refi nance operations and 12 Morgan, Peter J. (2013): Monetary Policy Frameworks in Asia: Experience, Lessons, and Issues, ADBI Working Paper Series, No. 435, September. 13 Rose, Andrew (2013): Surprising Similarities: Recent Monetary Regimes of Small Economies, CEPR Discussion Paper Series No. 9684, October. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 31 (b) other discretionary operations. Under the main refi nance operations, the most common instruments are OMOs, which are conducted on a pre-announced date by a central bank with voluntary participation from banks and primary dealers (PDs). Ideally, OMOs are used for both lending and borrowing, and include both outright purchase and repurchase agreements, depending upon the nature of liquidity requirements structural or frictional. Some countries use both short term and long term repos (e. g. UK) and others use central bank bills (Switzerland) and stabilisation bonds (Korea) to manage liquidity. Other discretionary operations to manage liquidity are mainly in response to unexpected short-term developments requiring non-standard, non-regular operations. Such operations include forex-swaps (Australia, Singapore), term deposits (Australia), compulsory deposits (Mexico), additional loans and deposits (Sweden) and funding for lending (UK). III.39. Among the terms and conditions, eligibility of collateral is one of the most important aspects of liquidity management. All major central banks include public sector securities of their own country as eligible collateral. Since mid-2007, the eligibility frame has been widened in several countries to include fi nancial entity debt (Japan, Mexico, Sweden and UK), covered bonds (Australia and UK), other asset backed securities (Australia, Canada, Mexico and UK), corporate debt and loans and other credit claims (Canada and UK) and cross-border collateral (Australia, Japan, Mexico and Singapore). With increased acceptance of diversifi ed securities as collateral, countries have also adopted different policies relating to pricing, initial margins and haircuts. III.40. As regards tenor of the liquidity facility, most central banks provide an overnight window, but country experiences show many instances of access to liquidity beyond overnight (for instance, the repo operation is up to one year in Australia and Japan, 65 days in the USA, one week in Korea, Switzerland and Sweden, and 25 days in Mexico). The frequency of such operations also varies considerably across countries, with short-term repos on a daily/weekly basis, but also with longer-term operations once in a month or as per the discretion of the central bank. Other discretionary operations of both standardized and non-standardized nature vary from intra-day provision of liquidity several times a day (UK, Japan, Euro area) to long-term sterilisation operations and sporadic use of compulsory deposits (as in Mexico). III.41. In view of the legacy infl uence of monetary targeting, there is often the challenge of distinguishing between liquidity management and monetary management. What is important to clarify in this context is that the same set of instruments could be used for liquidity management under an interest rate targeting rule and for monetary management under a monetary or reserve targeting rule. Thus, every instrument of liquidity management is a monetary policy instrument as well, but in an interest rate based operating framework, it is through liquidity management that the operating target is attained. Other than explicit changes in the policy interest rate or interest rate target which alone should convey the stance of monetary policy all other instruments may have to be seen as primarily meant for liquidity management, but consistent with the stance of monetary policy. In India, however, at least in the past few years, changes in policy rates and reserve requirements have at times conveyed divergent signals, thereby becoming a source of market confusion, which needs to be avoided by ensuring consistency between interest rate actions and liquidity management. 4.3 Non-monetary Instruments III.42. While the use of monetary instruments in striving to achieve monetary policy objectives is quite pervasive, central banks have been employing non - monetary instruments as part of their overall policy toolkit and these instruments subserve monetary Chapter III Organisational Structure, Operating Framework and Instruments of Monetary Policy 32 policy considerations eventually. These instruments are tailored to deal with various exigencies: surges in capital fl ows credit allocation pro-cyclicality and interconnectedness and the zero lower bound on the nominal interest rate, to note a few. III.43. One set of instruments is primarily regulatory in nature: selective credit control measures ranging from improving credit culture (establishing credit bureaus credit registry higher risk weights for sensitive sectors), supervisory measures (on-site and off-site inspection of banks) and moral suasion. More recently, in order to halt the downward spiral of lending and borrowing that has plagued economies since the recession, central banks have activated schemes to kick-start the real economy, best exemplified by the Funding for Lending Scheme (FLS) initiated in the UK in July 2012 to allow commercial banks to borrow funds at a cheap rate from the central bank and lend to specifi ed households and fi rms. III.44. A second set of measures, primarily fi nancial in nature, work their way through the foreign exchange market: liberalising/restricting capital fl ows intervention in the foreign exchange market and sterilisation operations reserve requirements on foreign currency instruments and variants of the Tobin tax. III.45. A third set of measures is macroprudential in nature, designed to contain systemic risks. More specifically, such measures seek to address two specific dimensions of systemic risk the time 14 While measures addressing the time dimension are most common (capital ratios or credit growth, loan to value and debt to income ratios, liquidity requirements), several countries have recently undertaken measures aimed at the cross-section dimension, most notably in Switzerland (capital surcharge for systemically important entities), Korea (levy on non-core liabilities of banks, with the levy rate depending on maturity) and New Zealand (core funding ratio, wherein at least 75 per cent of banks total lending will have to be funded with stickier liabilities such as retail deposits and wholesale borrowing maturing in more than a year). Indonesia, for example, raised reserve requirements on foreign currency accounts in March and June 2011 Taiwan effected similar such measures in January 2011. Chile in 1991 imposed a non-interest bearing 30 per cent reserve requirements on foreign currency liabilities. In 2008, Iceland became the fi rst industrial country in decades to impose capital controls, to limit a fl ight of capital from its busted banks. Between 2009 and 2011 Brazil, South Korea, Thailand, Indonesia, among others, introduced controls to discourage infl ows of hot money that they feared would drive their currencies to uncompetitive levels. 15 RBI (2011): Working Group on Operating Procedure of Monetary Policy, Chairman: Deepak Mohanty, available on rbi. org. in Table III.1: Use of Macro-Prudential Instruments by Country-Groupings Instrument Advanced Emerging Total Number of Countries Loan-to-value 9 15 24 Debt-to-income 2 5 7 Cap on credit growth 1 5 6 Limit on foreign lending 1 7 8 Reserve requirement 0 5 5 Dynamic provisioning 1 8 9 Countercyclical capital requirement 0 2 2 Restriction on profi t distribution 0 6 6 Others 1 12 13 Source: Claessens, Stijn et al. (2013): Macro-Prudential Policies to Mitigate Financial System Vulnerability, Journal of International Money and Finance, 39. dimension (excessive leverage in upturns and excessive risk aversion in downturns) and the cross - sectional dimension or risk concentration (size, substitutability, interconnectedness) as collapse of large or systemically important fi nancial institutions can destabilise the rest of the financial system14 (Table III.1). 5. The Current Operating Framework of Monetary Policy in India III.46. The current operating framework of monetary policy was implemented in May 2011 on the recommendations of the Working Group on Operating Procedure of Monetary Policy (RBI, 2011)15. The framework has the following distinguishing features: (a) the repo rate is the single policy rate (b) the operating target is the weighted average overnight Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 33 call rate, which is aligned to the repo rate through: (i) a corridor around the repo rate of 100 basis points above the repo rate for the Marginal Standing Facility (MSF) and 100 basis points below the repo rate for the reverse repo rate, and (ii) full accommodation liquidity management albeit with an indicative comfort zone of /- one per cent of net demand and time liabilities (NDTL) of the banking system and (c) transmission of changes in the repo rate through the weighted average call rate to the ultimate goals of monetary policy without any specifi c intermediate target. III.47. The transition to the current framework in which the interest rate is the operating target, from the earlier regime based on reserve targeting i. e. base money, borrowed reserves, non-borrowed reserves was generally driven by two guiding considerations. First, fi nancial sector reforms largely freed the interest rate from administrative prescriptions and setting (Appendix Table III.3), thereby enhancing its effectiveness as a transmission channel of monetary policy. Second, the erosion in stability and predictability in the relationship between money aggregates, output and prices with the proliferation of fi nancial innovations, advances in technology and progressive global integration. 5.1 Liquidity Management Framework and Operations in India III.48. The liquidity management framework in India stands on two broad mutually reinforcing pillars of forward looking assessment. Pillar-I is an assessment of the likely evolution of system-level liquidity demand based on near-term (four to six weeks) projections of autonomous drivers of liquidity. This forms the basis for taking decisions on use of discretionary liquidity absorbing/injecting measures to ensure that the liquidity conditions remain consistent with the goal of aligning money market rates to the policy repo rate. Pillar-II is an assessment of system-level liquidity over a relatively longer time horizon, focusing on the likely growth in broad money, bank credit and deposits, the corresponding order of base money expansion and this assessment is then juxtaposed with a breakdown into autonomous and discretionary drivers of liquidity derived under Pillar I. Thus, Pillar II becomes the broader information set within which decisions relating to discretionary liquidity management measures are taken on the basis of Pillar I assessment. Pillar-I III.49. The core of Pillar I is near-term forecasts of autonomous drivers of liquidity, particularly demand for currency (which refl ects behavior of households), demand for excess reserves (which refl ects behavior of the banking system), and the central governments balances with the RBI (which depends on cash fl ows of the Government). Large fl uctuations in the central governments balances with the RBI lead to corresponding automatic expansion/contraction in the RBIs balance sheet, which has a magnifying impact on the overall monetary conditions. For the purpose of liquidity management, forex market intervention is also an autonomous driver of liquidity, but since there cannot be any near term forecasts for these interventions, they are considered on information as available i. e. backward looking, impacting liquidity evolution on t2 settlement basis (Table III.2). The extent of volatility seen in the major frictional drivers of liquidity has been large (Table III.3), which poses the challenge of generating Table III.2: Current Liquidity Management Framework Autonomous Drivers of Liquidity Currency demand Bank reserves (required plus excess) Governments deposits with RBI Net forex market intervention Liquidity Management Net LAF (repo plus MSF plus reverse repo), Term Repos, OMOs, CRR, CMBs, MSS, Swaps, and Standing Refi nance Windows Chapter III Organisational Structure, Operating Framework and Instruments of Monetary Policy 34 credible and precise short-term forecasts of liquidity demand in the system. Nevertheless, using a combination of forward looking information and a backward looking assessment of the time series evolution of the frictional determinants of liquidity, projections are generated on a regular basis to inform the RBIs decisions on discretionary liquidity management. III.50. The RBIs discretionary liquidity management operations (primarily in the form of OMOs and changes in CRR, and also in terms of fi xing limits for term repos and overnight repo amounts)16 is guided by the extent of LAF defi cit that is reasonable at any point of time, and the assessment of drivers of LAF deficit/surplus, i. e. whether frictional or structural. Pillar-II III.51. Broad money growth that is consistent with infl ation and growth projections at the beginning of the year and reviewed from time to time in a state - contingent manner provides leads about the growth in base money that will be required in the system during the course of the year. After accounting for autonomous drivers of liquidity and borrowed reserves (i. e. access to LAF by banks), assessment of the amount of discretionary liquidity management operations becomes possible, given the desirable evolution of the base money path as also the extent of L AF deficit /surplus relat ive to a norm (communicated in the form of /- one per cent of NDTL). Rigid adherence to a base money rule is avoided due to uncertainties surrounding the relationship between monetary aggregates and the ultimate goal variables. Empirical estimates point to some improvement in the sensitivity of money demand to changes in the interest rate (Appendix Table III.4), thus providing the rationale for anchoring the operating framework with an interest rate rule. Currently, trajectories of monetary aggregates are only referred to as indicative. 5.2 Refi nance Windows Undermine the Operating Framework III.52. For an operating framework that modulates liquidity consistent with the policy rate, standing sector-specific refinance facilities interfere with monetary policy transmission because of the assurance such facilities provide on additional access to liquidity at rates not determined by market forces. Accordingly, sector-specifi c refi nance facilities have been phased out in India, though they tend to be Table III.3: Variations in Frictional Drivers of Liquidity since April 2012 ( crore) Major Autonomous Determinants of Liquidity Conditions Weekly Changes Daily Changes Positive Negative Positive Negative High Low High Low High Low High Low 1 Govt. cash balances with the RBI 71,692 5 62,835 621 48,504 38 49,072 2 2 Currency Demand 25,160 80 15,282 90 N. A. 3 SCBs balances with the RBI (changes in excess CRR) 55,916 57 90,182 571 48,090 13 59,131 20 : Excluding the large change of 1,38,800 on July 16, 2013. 16 To address exchange market volatility, since mid-July 2013 the RBI has restricted access to borrowed reserves, with caps on overnight repos and term repos. Even after normalization of the exceptional measures, limits on term repos and overnight repos have become an integral part of the liquidity management apparatus. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 35 reopened or re-introduced in new forms on pressures by sector-specifi c lobbies for special monetary policy support (Appendix Table III.5). Sector-specific refi nance facilities ultimately confl ict with the goal of price stability. For a monetary policy framework that assigns primacy to lowering infl ation through monetary policy actions, it is necessary that all sector - specific liquidity facilities be discontinued, accompanied by unambiguous communication that requests for sector specifi c liquidity support from any sector cannot be accommodated by the RBI. 5.3 Recent Experience with Monetary/Liquidity Management Operating Framework and Rationale for Change III.53. The experience since the institution of the extant operating framework, especially in terms of final macro outcomes has been disappointing persistence of infl ation well above the threshold of 5 per cent (WPI) articulated by the RBI and de facto monetization of the fi scal defi cit to the extent of 28 per cent of the overall borrowing programme of the Government on average via injections of primary liquidity through OMOs. Real policy rates have been persistently negative in high infl ation episodes, as the operating framework does not follow a rule that can limit the scope for infl ation tolerance (Chart III.1)17. III.54. Following a simple rule (illustratively the thumb rule proposed by Taylor, 1993) 18 would have resulted in the repo rate path being much higher in the last few years than it has been, and thereby yielding positive real policy rates (Chart III.2a). On the other hand, if the output gap and infl ation gap coeffi cients are estimated from data relating to the current and past monetary policy regimes for India and used in a Taylor-type formulation, the implied repo rate paths would lie lower than CPI infl ation, yielding negative real policy rates (Chart III.2b). This empirical fi nding is validated for a range of estimates (i. e. for output gaps estimated using the HP fi lter, Christiano-Fitzgerald fi lter and unobserved component 17 Back-casted CPI-Combined data used in this report are given in Appendix Table III.6. 18 As per the rule of thumb i r 0.5( ) 0.5 (y y), or i r 1.5( ) 0.5 (y y), where i nominal interest rate, rate of infl ation, infl ation target, r neutral real rate, and (y-y) output gap. Applying the same coeffi cients for the infl ation gap and output gap from the Taylor equation to estimated infl ation gap and output gap for India yields an interest rate path that lies above the actual repo rate path, particularly during the high infl ation phase of last few years. The rule implicitly highlights the justifi cation for a positive real interest rate when infl ation exceeds the target, and the need for positive real interest rates to manage infl ationary pressures. (Taylor, J.(1993): Discretion versus Policy Rules in Practice, Carnegie Rochester Conference Series on Public Policy, 39, pp. 195-214). Chapter III Organisational Structure, Operating Framework and Instruments of Monetary Policy 36 model, as also for CPI infl ation thresholds of fi ve per cent and six per cent). Estimated coeffi cients from extant interest rate rules in India suggest that: (i) inadequate weight was placed on infl ation management in the past, and (ii) the WPI was the metric used to measure infl ation, resulting in policy rates that were often negative in real terms vis--vis the CPI19. It may be necessary, therefore, to start with a simple policy rule in terms of a real policy rate as a context specifi c benchmark for the MPC20, and then gradually move to a Taylor type rule after securing price stability and anchoring infl ation expectations. Under a fl exible infl ation targeting framework, the interest rate rule should assign a signifi cantly greater weight to infl ation management vis--vis other objectives. The outcome of such a framework is expected to result, on average, in positive real rates of return when infl ation is above target. III.55. Turning to the conduct of l iquidity management operations and transmission of policy impulses, there has also been blocked transmission of policy rate cuts to support growth due to the central premise of keeping the system in a defi cit mode and the call rate aligned to the repo rate, thereby suggesting the following limitations: 1. Liquidity management through the LAF (i. e. up to excess SLR holdings plus additional access to liquidity from the MSF window by dipping 2 per cent below the required SLR) has made base money expansion endogenous. The policy stance, as refl ected in changes in the repo rate, and the conduct of liquidity management are often mutually inconsistent and conflicting. Often, increases in policy rate have been followed up with discretionary measures to ease liquidity conditions. 2. The framework is one-sided by design, suitable only to transmission of a tightening stance through the persisting liquidity defi cit mode in which the system is kept consequently, the easing stance of policy between October 2011 and May 2013 did not transmit to arresting the growth slowdown. 3. Provision of overnight liquidity on an enduring basis at the overnight repo rate also compromised liquidity/treasury planning by banks themselves resulting in this function being in effect shifted to the RBI and thereby stunting the growth of the market spectrum to the overnight segment 19 It is important to note that available published research on policy reaction functions of the Taylor-type formulation for India have not been estimated using the CPI the estimates generally relate to either the WPI or the GDP defl ator. Moreover, a policy reaction function for India, as in all other countries, employing the interest rate as the policy instrument, tend to have a high coeffi cient for interest rate smoothing, which is ignored in the analysis here. (see Gabriel et al. 2012, in Oxford Handbook of the Indian Economy, C. Ghate, (Ed.), Oxford: New York). Importantly, estimated Taylor rule parameters (or any other empirical estimates) need to exhibit structural stability for a central bank to exploit the estimated relationship for the conduct of policy systematically, but as the Lucas critique suggests, the estimated parameters are often not structural, i. e. not policy invariant. 20 Given the uncertainty about the estimated neutral real interest rate, and assuming that it will be positive for India, a simple positive real policy rate rule may not be anti-infl ationary when infl ation persistently and sizably exceeds the infl ation target. However, in view of the negative real policy rate prevailing in the recent episode of high infl ation, the most immediate requirement would be to ensure that the real policy rate becomes positive, and once the regime change is in place, the standard Taylor type rule-based approach with an appropriate weight assigned to infl ation could be used by the MPC. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 37 alone, dis-incentivising the development of a term money market the LAF to a degree has become a conduit for gaming central bank liquidity and substituting for efforts to access market liquidity. III.56. In order to improve transmission of policy rate changes into the spectrum of interest rates in the economy, the excessive focus on the overnight segment of the money market in the existing framework has to be avoided, which will be possible only if the RBI de-emphasises overnight repos for liquidity management and progressively conducts its liquidity management primarily through term repos of different tenors. Development of a term money market through a term-repo driven liquidity management framework could help in establishing market-based benchmarks, which in turn would help improve transmission, if various fi nancial instruments and, in particular, bank deposits and loans are priced off these benchmarks. III.57. An overall assessment would, therefore, suggest that in order to imbue credibility and effectiveness into the operating framework of monetary policy in terms of achieving and establishing the nominal anchor (addressed in Chapter II), it is essential to address impediments to transmission (covered in Chapter IV) and deal with the challenges confronting it through design changes and refi nements in the operating framework, with fl exibility in the use of instruments, particularly in the context of liquidity management and its consistency with the goal(s) of monetary policy. III.58. The recent experience with the use of exceptional monetary measures to contain exchange market volatility and their subsequent normalization represents a break from the operating framework put in place since May 2011. This experience strengthens the rationale for revamping the operating framework so as to ensure its consistency and synchronicity with monetary policy objectives and stance. The RBIs current operating framework is pivoted around a target for borrowed reserves in relation to net demand and time liabilities. Conditional upon this operating target, it has allowed bounded movement in the call rate between the term repo rate and the MSF rate, effectively eschewing unlimited accommodation at the repo rate of the past. Increasingly, the term repo is gaining market acceptability, synchronized as it is with the reserve requirement cycle, while allowing a smooth transition away from liquidity provision at the MSF rate. The term repo rate has also proved to be a more useful indicator of underlying liquidity conditions since price discovery of the term premium is through variable rate auctions, unlike the overnight repo rate which is a fixed rate. The successful operation of the term repo rate should incentivize the development of a fuller spectrum of term money segments, thereby enabling market based benchmarks to be established for pricing bank deposits and facilitating transmission of policy impulses to credit markets. The market has also adjusted to the new liquidity management environment well. In this system, full accommodation of liquidity demand continues because of the access to the MSF. It is necessary, therefore, that the MSF rate may be set in a manner that it becomes a truly penal rate, accessed by banks under exceptional circumstances. Recommendations III.59. The Committee recommends that, as an overarching prerequisite, the operating framework has to subserve stance and objectives of monetary policy. Accordingly, it must be redesigned around the central premise of a policy rule. While several variants are available in the literature and in country practices, the Committee is of the view that a simple rule defi ned in terms of a real policy rate (that is easily communicated and understood), is suitable to Indian conditions and is consistent with the nominal anchor recommended in Chapter II. When inflation is above the nominal anchor, the real policy rate is expected, on average, to be positive. The MPC could Chapter III Organisational Structure, Operating Framework and Instruments of Monetary Policy 38 decide the extent to which it is positive, with due consideration to the state of the output gap (actual output growth relative to trend/potential) and to fi nancial stability. III.60. Against this backdrop, the Committee recommends that a phased refinement of the operating framework is necessary to make it consistent with the conduct of monetary policy geared towards the establishment and achievement of the nominal anchor (Table III.4). Phase-I III.61. In the fi rst or transitional phase, the weighted average call rate will remain the operating target, and the overnight LAF repo rate will continue as the single policy rate. The reverse repo rate and the MSF rate will be calibrated off the repo rate with a spread of (/-) 100 basis points, setting the corridor around the repo rate. The repo rate will be decided by the MPC through voting. The MPC may change the spread, which, however, should be as infrequent as possible to avoid policy induced uncertainty for markets. III.62. Provision of liquidity by the RBI at the overnight repo rate will, however, be restricted to a specifi ed ratio of bank-wise net demand and time liabilities (NDTL), that is consistent with the objective of price stability. As the 14-day term repo rate stabilizes, central bank liquidity should be increasingly provided at the 14-day term repo rate and through the introduction of 28-day, 56-day and 84-day variable Table III.4: Proposed Operating Framework for Monetary Policy Phase-I Phase-II Policy Rate to be announced by the MPC Repo rate (overnight). Target policy rate for short end of the money market. Operating target for monetary policy Weighted average call rate. 14-day term repo rate. Liquidity management Full accommodation (through a mix of specifi ed amounts of overnight repos at fi xed rate, and term repos at variable rate) ECR to be phased out. Full accommodation (primarily through 14-day term repos at variable rate aimed at achieving the target rate, supported by fi ne tuning through overnight repos/reverse repos, longer term repos and open market operations). No refi nance facility. MSF the ceiling of the corridor As a standing facility, this will be available every day. If adequate liquidity is injected through overnight/term repos, use of MSF will be minimal. MSF will set the ceiling of the corridor, but must be seen as a truly penal rate. If the liquidity taken during the fortnight through 14-day term repo is managed effectively, there will be rare need for accessing the MSF. Reverse repo rate The fl oor of the corridor but transition to standing deposit facility will start. Reverse repo will be used in fi ne tuning operations i. e. to impound only daily surplus liquidity from the system to ensure that money market rates do not drop below the policy target rate. Standing deposit facility will replace reverse repo as the fl oor of the corridor, and reverse repo rates will be close to the policy rate. Liquidity assessment By the RBI based on frictional and structural drivers of liquidity. Daily reporting by banks (aggregated for the system as a whole) will complement the RBIs assessment of liquidity. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 39 rate auctioned term repos by further calibrating the availability of liquidity at the overnight repo rate as necessary. III.63. The objective should be to develop a spectrum of term repos of varying maturities with the 14-day term repo as the anchor. As the term yield curve develops, it will provide external benchmarks for pricing various types of fi nancial products, particularly bank deposits, thereby enabling more efficient transmission of policy impulses across markets. III.64. During this phase, the RBI should fi ne-tune and sharpen its liquidity assessment with a view to be in a position to set out its own assessment of banks reserves. This will warrant a juxtaposition of top - down approaches that estimate banks reserves demand consistent with macroeconomic and fi nancial conditions appropriate for establishing the nominal anchor, and bottom-up approaches that aggregate bank-wise assessments of liquidity needs submitted by banks themselves to the RBI on a daily basis. As these liquidity assessments become robust, they should be announced for market participants prior to the commencement of market operations every day and could be subjected to review and revision during the day for fi ne-tuning them with monetary and liquidity conditions. It is envisaged that the RBI will expand capabilities to conduct liquidity operations on an intra-day basis if needed, including by scaling up trading on the NDS-OM platform. III.65. Consistent with the repo rate set by the MPC, the RBI will manage liquidity and meet the demand for liquidity of the banking system using a mix of term repos, overnight repos, outright operations and the MSF. Phase-II III.66. As term repos for managing liquidity in the transition phase gain acceptance, the policy rate voted on by the MPC will be a target rate for the short end of the money market, to be achieved through active liquidity management. The 14-day term repo rate is superior to the overnight policy rate since it allows market participants to hold central bank liquidity for a relatively longer period, thereby enabling them to on lend/repo term money in the inter-bank market and develop market segments and yields for term transactions. More importantly, term repos can wean away market participants from the passive dependence on the RBI for cash/treasury management. Overnight repos under the LAF have effectively converted the discretionary liquidity facility into a standing facility that could be accessed as the fi rst resort, and precludes the development of markets that price and hedge risk. Improved transmission of monetary policy thus becomes the prime objective for setting the 14-day term repo rate as the operating target. III.67. Based on its assessment of liquidity, the RBI will announce the quantity of liquidity to be supplied through variable rate auctions for the 14-day term repos alongside relatively fi xed amounts of liquidity provided through longer-term repos. III.68. The RBI will aim at keeping 14-day term repo auction cut-off rates at or close to the target policy rate by supplementing its main policy operation (14-day term repos) with: (i) two-way outright open market operations through both auctions and trading on the NDS-OM platform (ii) fi ne tuning operations involving overnight repos/reverse repos (with a fi ne spread between the repo and reverse repo rate) and (iii) discretionary changes in the CRR that calibrate bank reserves to shifts in the policy stance. III.69. The MSF rate should be set in a manner that makes it a truly penal rate to be accessed only under exceptional circumstances. III.70. An accurate assessment of borrowed and non-borrowed reserves and forward looking projections of liquidity demand would assume critical importance in the framework. So far, the governments Chapter III Organisational Structure, Operating Framework and Instruments of Monetary Policy 40 cash balances have been the prime volatile autonomous driver of liquidity, making accurate liquidity projections a diffi cult task. Therefore, continuing with reforms in the Government securities market, which envisage that the debt management function should be with the Government, the cash management function should concomitantly also be with the Government 21. New Instruments III.71. To support the operating framework, the Committee recommends that some new instruments be added to the toolkit of monetary policy. Firstly, to provide a fl oor for the new operating framework for absorption of surplus liquidity from the system but without the need for providing collateral in exchange, a (low) remunerated standing deposit facility may be introduced, with the discretion to set the interest rate without reference to the policy target rate. The introduction of the standing deposit facility (analogous to the marginal standing facility for lending purposes) will require amendment to the RBI Act for which the transitional phase may be utilised. The standing deposit facility will also be used for sterilization operations, as set out in Chapter 5, with the advantage that it will not require the provision of collateral for liquidity absorption which had turned out to be a binding constraint on the reverse repo facility in the face of surges in capital fl ows during 2005-08. III.72. Secondly, term repos of longer tenor may also be conducted since term repo market segments could help in establishing market based benchmarks for a variety of money market instruments and shorter - term deposits/loans. III.73. Thirdly, dependence on market stabilisation scheme (MSS) and cash management bills (CMBs) may be phased out, consistent with Government debt and cash management being taken over by the Governments Debt Management Offi ce (DMO). III.74. Fourthly, all sector specifi c refi nance should be phased out. 21 The Committee on Capital Account Convertibility (1997) recommended the separation of debt management from monetary management. The Advisory Group on Transparency in Monetary and Financial Policies (2000) recognised that separation of debt management and monetary policy is a necessary but not suffi cient condition for effective monetary policy which would also require a reasonable degree of fi scal responsibility. The RBIs Annual Report 2001-02 also emphasized that the separation of debt management could greatly facilitate the performance of monetary management by the RBI. The Union Budget for 2007-08 highlighted that World over, debt management is distinct from monetary management. The establishment of a Debt Management Offi ce (DMO) in the Government has been advocated for quite some time. The fi scal consolidation achieved so far has encouraged us to take the fi rst step. Accordingly, I propose to set up an autonomous DMO and, in the fi rst phase, a Middle Offi ce will be set up to facilitate the transition to a full-fl edged DMO. Following this announcement, the Middle Offi ce was established in September 2008 in the Ministry of Finance. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 41 Chapter IV Addressing Impediments to Transmission of Monetary Policy 1. Introduction IV.1 The effi cacy of monetary policy actions lies in the speed and magnitude with which they achieve the fi nal objectives. With the deepening of fi nancial systems and growing sophistication of financial markets, most monetary authorities are increasingly using indirect instruments (such as policy interest rates and open market operations) rather than direct measures (like credit allocation). Adjustments in the policy interest rate, for instance, directly affect short - term money market rates which then transmit the policy impulse to the fuller spectrum of interest rates in the fi nancial system, including deposit and lending rates, that in turn affect consumption, saving and investment decisions of economic agents and eventually aggregate demand, output and infl ation. The interest rate channel of transmission has become the cornerstone of monetary policy in most countries. This channel may also operate through expectations of future interest rates, and thereby infl uence the behaviour of economic agents in an economy in a forward looking manner. IV.2 Underdeveloped and incompletely integrated market segments inhibit the transmission of monetary policy through the interest rate channel. Accordingly, some central banks operate by directly altering reserve requirements alone or in conjunction with the policy interest rate to affect the availability and price of credit. IV.3 The transmission mechanism is characterised by long, variable and uncertain time lags, making it diffi cult to predict the precise effect of monetary policy actions on the economy. Apart from differential lags, there are also asymmetries involved in the quantitative responses of the policy impulse to the goal variables in alternate phases of the business cycle and liquidity conditions. It is generally accepted in the literature that monetary policy has limited effects on aggregate supply or productive capacity, though in the presence of credit constraints, the ability of fi rms to expand capacities is impacted, thus affecting aggregate supply1. 2. International Experience IV.4 Monetar y transmission in advanced economies occurs through several alternative channels, and is generally found to be robust and effi cient in normal times. In contrast, in emerging market economies (EMEs), it is the credit channel that dominates transmission2. 2.1. Interest rate channel IV.5 In the case of advanced economies (AEs), the interest rate channel works by impacting the cost of capital. It has been found to be strong and has exhibited good information content about future movement of real macroeconomic variables (Bernanke and Blinder, 1992)3. In the case of EMEs, which do not have well-functioning capital markets for debt and equities, and in which real estate markets are fragmented and illiquid, monetary transmission through the interest rate has been found to be weak. Furthermore, the interest rate channel is also dulled 1 Against the backdrop of the recent fi nancial crisis, some preliminary evidence suggests that the damage to productive capacity in the US was an endogenous response to weak aggregate demand (Reifschneider, D. W. L. Wascher and D. Wilcox, (2013): Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy, 14th Jacques Polak Annual Research Conference, IMF, Washington). 2 Mishra, P. and P. Montiel (2012), How Effective is Monetary Transmission in Low Income Countries A Survey of Empirical Evidence, IMF Working Paper, No. WP/12/143, June. 3 Bernanke, B. S. and A. S. Blinder (1992), The Federal Funds Rate and the Channel of Monetary Transmission, The American Economic Review, 82(4): 901-21. Chapter IV Addressing Impediments to Transmission of Monetary Policy 42 during surges in capital infl ows. On an average across Asian economies, the pass-through coeffi cients for transmission from policy rates to lending rates declined by about 30-40 basis points during episodes of capital infl ows, but were still about 0.3-0.6 (Jain - Chandra and Unsal, 2012)4. Transmission from policy rates to money market rates and retail lending rates is found to be strong in transition economies of Europe, but the transmission to longer maturity rates is rather weak (gert and MacDonald, 2009)5. However, recent evidence suggests that the interest rate channel is strengthening in many EMEs, including India 6. This is attributed, inter alia, to reduced fiscal dominance, more flexible exchange rates and development of market segments (Gumata et al. 2013)7. 2.2. Credit Channel IV.6 Empirical evidence supports the existence of the credit channel of transmission. This operates by affecting the external fi nance premium through both the bank lending channel (by decreasing the supply of bank loans in response to contractionary monetary policy) and the balance sheet channel (contractionary monetary policy decreases collateral valuation and net worth of fi rms, raises agency costs and affects fi rms activity levels through the fi nancial accelerator). Recent evidence from the euro area suggests that the bank lending channel was more pronounced than the balance sheet channel in the case of fi rms, while for households, it was the other way round (Cicarrelli, et al, 2010)8. The bank lending channel is also found to have a larger impact on banks that are small, less capitalised and less liquid. Some evidence suggests that fi rms substitute trade credit for bank loans at times of monetary contraction, thus weakening the credit channel. This is particularly the case for EMEs. In the case of Sub-Saharan Africa, excluding South Africa, the bank lending channel has been found to work feebly, given that informal fi nance dominates credit markets and the penetration of institutional fi nance is limited, given the low competition from the banking sector. However, in the case of many EMEs, especially where bank-oriented financial systems exist, the credit channel is strong. While informal fi nance weakens monetary transmission, experience suggests that transmission through the credit channel is strong in the case of micro-fi nance institutions (MFIs). 2.3. Exchange Rate Channel IV.7 An important channel of monetar y transmission has been the exchange rate that is either directly influenced by the central bank or gets impacted by its actions. Typically, the exchange rate channel works through expenditure switching between domestic and foreign goods. For instance, an appreciation of the domestic currency makes foreign goods cheaper causing demand for domestic goods and net exports to fall. However, this may also reduce external debt in domestic currency terms. Both effects transmit to aggregate demand and the price level. Empirical evidence suggests that the exchange rate channel is strong in economies with freely fl oating exchange rates, but its impact is dampened with central bank intervention. For instance, in the case 4 Jain-Chandra, S. and D. F. Unsal (2012): The Effectiveness of Monetary Policy Transmission Under Capital Infl ows: Evidence from Asia, IMF Working Paper No. WP/12/265. 5 gert, B. and R. MacDonald (2009): Monetary Transmission Mechanism in Central and Eastern Europe: Surveying the Surveyable, Journal of Economic Surveys, 23(2): 277-327. 6 Mohanty, M. S. and P. Turner (2008): Monetary Policy Transmission in Emerging Market Economies: What is New, BIS Policy Paper No.3, January. 7 Gumata, N. A Kabundi and E. Ndou (2013): Important channels of transmission of monetary policy shock in South Africa, ERSA Working Paper No. 375, Cape Town. 8 Cicarelli, M. A. Maddaloni and J. L. Peydro (2010): Trusting the Bankers: A New Look at the Credit Channel of Monetary Policy, ECB Working Paper No.1228. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 43 of Latin American countries, lower exchange rate fl exibility relative to peers in Asia seems to have resulted in weaker transmission of policy rates. 2.4. Asset Price Channel IV.8 Apart from exchange rates, changes in other asset prices such as equities and house prices also impact inflation and growth. Equity prices are dampened in response to contractionary monetary policy and the resultant wealth effects and collateral valuation changes feed through to consumption and investment. The asset price channel is quite weak in many EMEs where equity markets are small and illiquid, but relatively strong in countries that have open equity markets. Transmission is also found to be limited in countries with weak property price regimes and poorly developed and illiquid real estate markets. In countries like the US and Australia, where the mortgage market is well integrated with capital markets, the asset price channel turns out to be quite strong. In general, stock prices respond faster to contractionary monetary policy, though the intensity and lags of transmission are impacted by the liquidity in the stock markets. 2.5. Transmission Lags IV.9 Time lags in transmission are usually long, variable and tend to differ from one country to another owing to differences in economic and market structures. They also vary over time due to dynamically changing macroeconomic and fi nancial conditions. For instance, these lags are found to vary from 1-14 quarters for transmission of policy rates to output across a gamut of advanced and emerging economies with varied monetary arrangements. While transmission is weaker in case of EMEs, it is not clear if the transmission lags are longer. In fact, some recent evidence suggests longer lags for AEs relative to EMEs for instance, average lag of 33.5 months for all countries 42 months in the case of the US, 48 months for the euro area, and in the range of 10-19 months for transition economies that became new EU members (Havrnek and Rusnk, 2012)9. For Brazil, the monetary policy transmission through the aggregate demand channel takes between 6 and 9 months: the interest rate affects consumer durables and investment in between 3 to 6 months and the output gap takes an additional 3 months to have a significant impact on inflation (Bogdanski et. al. 2000)10,11. 3. Sensitivity of Infl ation and Output to Monetary Policy in India IV.10 Empirical evidence indicates that monetary transmission in India has been taking place through several channels (RBI, 2005 Patra and Kapur, 2010 Mohanty, 2012 Khundrakapam and Jain, 2012 Khundrakapam, 2011 Kapur and Behera, 2012 Singh, 2011 and Keltzer, 2012)12. The broad consensus emerging from these studies is that monetary policy 9 Havrnek, T. and M. Rusnk (2012): Transmisson Lags in Monetary Policy: A Meta Analysis, Czech National Bank Working Paper Series, No.10. 10 Bogdanski, J. A. A. Tombini and S. R. C. Werlang (2000): Implementing Infl ation Targeting in Brazil, Working Paper Series No.1, Banco Central do Brasil. 11 However, transmission lags in cross-country studies may not be strictly comparable as they depend on the size and timing of the policy actions. 12 Kapur, M. and H. Behera (2012): Monetary Transmission Mechanism in India: A Quarterly Model, RBI Working Paper No. 9. Khundrakpam, J. K. (2011): Credit Channel of Monetary Transmission in India - How Effective and Long is the Lag, RBI Working Paper No. 20. Khundrakpam, J. K. and R. Jain (2012): Monetary Policy Transmission in India: A Peep Inside the Black Box, RBI Working Paper No. 11. Mohanty, D. (2012): Evidence on Interest Rate Channel of Monetary Policy Transmission in India, RBI Working Paper No. 6. Patra, M. D. and M. Kapur (2010): A monetary policy model without money for India, IMF Working Paper No.10/183, International Monetary Fund. Kletzer, K. (2012): Financial Frictions and Monetary Policy Transmission in India, The Oxford Handbook of the Indian Economy, Ed. by Chetan Ghate Reserve Bank of India (2005): Report on Currency and Finance, 2003-04. Singh, B. (2011): How Asymmetric is the Monetary Policy Transmission to Financial Markets in India, RBI Occasional Papers, Vol.32/2. Chapter IV Addressing Impediments to Transmission of Monetary Policy 44 in India impacts output with a lag of about 2-3 quarters and WPI headline infl ation with a lag of about 3-4 quarters and the impact persists for 8-12 quarters. Among the channels of transmission, the interest rate has been found to be the strongest. In view of the Committees choice of infl ation as the nominal anchor for monetary policy in India, this section primarily focuses on empirical evaluation of the transmission of monetary policy signals to infl ation. 3.1. Interest Rate Channel IV.11 Monetary policy interest rate movements have been found to share a co-integrating relationship with rates across different segments of fi nancial markets. Results of block exogeneity tests show that there exists bi-directional causality between call money rates and interest rates in other segments such as the government debt market, credit market or returns on equity market and the forex market13. Medium to long term rates such as bank deposit and lending rates exhibit asymmetrical responses to policy rate changes under varied market conditions, responding faster with relatively larger responses in liquidity defi cit conditions than in surplus conditions. Furthermore, lending rates for certain sectors such as housing and automobiles respond relatively faster to policy rate changes compared with other sectors. 3.2. Credit Channel IV.12 India is a bank-dominated economy, even though in recent years the role of equity and debt markets as sources of fi nancing of economic activities has increased. The share of banks in domestic corporate borrowing has remained high (Chart IV.1). High-dependence on bank fi nance makes the bank lending and the balance sheet channels particularly important for monetary transmission, which is also evidenced through Granger causality tests14. In terms of balance sheet effects, credit growth is seen to have an inverse relationship with movements in the policy rate15. 13 Following Singh (2011) and Mohanty (2012), Grangers causality across markets based on a VAR framework was examined using monthly data from April 2001 to March 2013. Two blocks were considered, viz. (i) policy variable proxied by monthly average Call Money Rate (CMR) and (ii) other fi nancial market variables. The latter include yield on government securities with residual maturity of 10-years and yield on the 5-year AAA rated corporate bonds representing debt market, weighted average lending rate (WALR) indicating credit market, BSE Sensex showing equity market, and Rupee per US dollar representing foreign exchange market. The test was repeated by replacing 5-year AAA rated corporate bond by the yield of the 10-year AAA rated corporate bonds and results were similar. 14 Pair-wise Granger Causality Tests Sample: 1999Q2 2013Q1 Lags: 2 Null Hypothesis: Obs. F-Statistic Prob. Non-Food Credit Growth does not Granger Cause Effective Policy Rate 54 0.17899 0.8367 Effective Policy Rate does not Granger Cause Non-Food Credit Growth 54 3.96329 0.0254 15 Recent work, i. e. Pandit and Vashisht (2011) , Khundrakpam (2011) and Khundrakpam and Jain (2012) also corroborated the existence of a robust and statistically signifi cant credit channel of monetary transmission in the post-LAF period. According to Khundrakpam (2011), a 100 basis points in - crease in policy rate reduced the annualised growth in nominal and real bank credit by 2.78 per cent and 2.17 per cent, respectively. Pandit, B. L. and P. Vashisht (2011), Monetary Policy and Credit Demand in India and Some EMEs, Indian Council for Research on International Economic Relations, Working Paper No.256. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 45 3.3. Exchange Rate Channel IV.13 The exchange rate channel is found to be feeble in India with some evidence of weak exogeneity16. While changes in policy interest rates may infl uence movements in exchange rates, the level of the exchange rate is not a policy goal, as the RBI does not target any level or band of the exchange rate. Exchange rate depreciation is a key source of risk to infl ation as the estimated pass-through coeffi cients for India suggest (Table IV.1). 3.4. Asset Price Channel IV.14 Empirical evidence for India indicates that asset prices, especially stock prices, react to interest rate changes, but the magnitude of the impact is small (Singh and Pattanaik 2012)24. Moreover, the wealth effect of increasing equity prices in the Indian case is found to be limited (Singh, 2012)25. With the increasing use of formal fi nance (from banks and non-banks) for acquisition of real estate, the asset price channel of transmission has improved. However, during periods of high infl ation, there is a tendency for households to shift away from fi nancial savings to other forms of savings such as gold and real estate that tend to provide a better hedge against infl ation. To the extent that these acquisitions are funded from informal sources, they may respond less to contractionary monetary policy, thus weakening the asset price channel in India. 16 Ray, P. H. Joshi and M. Saggar (1998): New Monetary Transmission Channels: Role of Interest Rate and Exchange Rate in the Conduct of Monetary Policy, Economic and Political Weekly, 33(44), 2787-94. 17 Khundrakpam, J. K. (2007): Economic reforms and exchange rate pass-through to domestic prices in IndiaBIS Working Papers 225, Bank for International Settlements. 18 Kapur, M. (2012): Infl ation Forecasting: Issues and Challenges, RBI Working Paper No. 1. 19 Kapur, M. and H. Behera (2012): Monetary Transmission Mechanism in India: A Quarterly Model, RBI Working Paper No.9. 20 Patra, M. D. and M. Kapur (2010), A monetary policy model without money for India, IMF Working Paper No.10/183, International Monetary Fund. 21 Patra, M. D. J. K. Khundrakpam, and A. T. George (2013): Post-Global Crisis Infl ation Dynamics in India What has Changed, Paper presented at the India Policy Forum, July 16-17. 22 Ghosh, A. and R. Rajan (2007): Macroeconomic Determinants of Exchange Rate Pass-Through in India, April. Available at SSRN: dx. doi. org/10.2139/ssrn.984332 23 Bhattacharya, R. Patnaik, I. Shah, A. (2008), Exchange rate pass-through in India, Macro/Finance Group at NIPFP, Online. Available at: macrofi nance. nipfp. org. in/PDF/BPS2008erpt. Pdf 24 Singh, B. and S. Pattanaik (2012): Monetary Policy and Asset Price Interactions in India: Should Financial Stability Concerns from Asset Prices be Addressed Through Monetary Policy, Journal of Economic Integration, Vol. 27,167-194. 25 Singh, B. (2012): How important is the stock market wealth effect on consumption in India, Empirical Economics, 43(3), 915-927. Table IV.1: Summary of Exchange Rate Pass-through Coeffi cient from Select Studies Study Time Period of Study Exchange rate pass-though coeffi cient WPI Khundrakpam (2007)17 1991M8 to 2005M3 10 per cent change in exchange rate increases fi nal prices by 60 bps in short run and 90 bps in long run Kapur (2012)18 Kapur and Behera (2012)19 1996 Q2 to 2011 Q1 10 per cent appreciation (depreciation) of rupee vis--vis the US dollar reduces (increases) infl ation by 60 bps in the same quarter, while the long-run pass-through is 120 basis points. Patra and Kapur (2010)20 1996 Q2 to 2009 Q3 A 10 per cent appreciation (depreciation) of the Indian rupee (vis-a-vis the US dollar) would reduce (increase) infl ation by 50 bps in the same quarter, by 150 percentage points after seven quarters. Patra et al. (2013)21 1996 Q2 to 2013 Q1 A 10 per cent change in the exchange rate resulted in 1.5 per cent change in prices prior to the global crisis and 1.0 per cent change including post crisis period. CPI Ghosh and Rajan (2007)22 1980Q1 to 2006Q4 Exchange rate pass-through elasticity of the rupee-USD to CPI to be between 45 and 50 percent and quite stable over the period under consideration Bhattacharya, et. al. (2008)23 1997M9 to 2007M10 One per cent increase in exchange rate causes rise in CPI level by 0.10-0.11per cent in the short run and 0.04-0.17per cent in the long-run Chapter IV Addressing Impediments to Transmission of Monetary Policy 46 4. Identifying Impediments to Transmission IV.15 In India, financial sector reforms and progressive deregulation of the financial sector created pre-conditions for conducting monetary policy primarily through changes in the interest rate as the main policy instrument. The effectiveness of monetary policy, however, remains constrained by several country-specifi c factors that affect transmission of the policy impulses through the interest rate channel. Some of the major factors are briefly explained below. 4.1. Sustained Fiscal Dominance IV.16 Despite phasing out of the Reserve Banks participation in primary issuances of Government securities (G-secs), fi scal dominance continues to impinge on monetary policy effi cacy as open market operations are intermittently deployed to manage yields in the face of large government borrowings. Data for the past decade show that whenever the net market borrowing of the government has increased, the ratio of incremental investment by banks in government securities has gone up, leading to lower share of non-food credit in bank fi nance, i. e. pointing to crowding out of the private sector (Chart IV.2). i. Statutory Pre-emption through SLR IV.17 Large government market borrowing has been supported by regulatory prescriptions under which most fi nancial institutions in India, including banks, are statutorily required to invest a certain portion of their specifi ed liabilities in government securities and/or maintain a statutory liquidity ratio (SLR) (Table IV.2). IV.18 The SLR prescription provides a captive market for government securities and helps to artifi cially suppress the cost of borrowing for the Government, dampening the transmission of interest rate changes across the term structure. It is also observed that the Government often borrows at a negative real interest rate, especially in recent years (Chart IV.3). While banks generally invest in government securities above the statutory prescription since excess SLR securities serve as the only collateral for availing central bank resources under the LAF (Table IV.3), a lower SLR prescription, ceteris paribus, is likely to decrease banks investments in G-secs. ii. Small Savings Schemes IV.19 Besides market borrowings, the other main source of funding government defi cits in India is small savings mobilised through, inter alia, post offi ce deposits, saving certifi cates and the public provident fund, characterised by administered interest rates and tax concessions. The interest rates on small savings were earlier changed infrequently26. Consequently, small savings in the past had acquired 26 Pursuant to the recommendations of the Committee on Comprehensive Review of National Small Savings Fund (Report submitted in June 2011), the government announced in November 2011 the alignment of the rate of interest on small savings schemes with interest rates on government securities of similar maturity with a spread of 25 basis points. It was also decided that the notifi cation of interest rate on small savings schemes for every fi nancial year would be before the year commenced. Nonetheless, some rigidities still remain in the interest rates on small savings instruments. This is because the benchmark yield is an average of the month-end yields of the previous fi nancial year. Also the interest rate stays fi xed for the year. These rigidities continue to pose impediments to transmission. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 47 a competitive edge over bank deposits during the easing phase of monetary policy, as was evident Table IV.2: Guidelines on Investment in Centre and State Government Securities (select institutions) Institution Instruments Minimum Allocation Remarks Gilt Funds Central Government Securities and State Development Loans (SDL). 100 per cent of total corpus. Life Insurance Companies Government Securities and other approved securities. 50 per cent of total corpus (of which 25 per cent in Government Securities). Non-life Insurance Companies (Pension and General Annuity Business) Government Securities, and other approved securities. 40 per cent of total corpus (of which 20 per cent in Government Securities). Employees Provident Fund Central Government Securities, SDL and other approved securities. 55 per cent of incremental accretions belonging to the Fund. This is the cap or maximum allocation. PFs/Retirement Trusts/Gratuity Funds Central Government Securities SDL and other approved securities. 25 per cent of Assets Under Management (AUM) 15 per cent of AUM. In addition to this, there is a discretionary investment to the extent of 30 per cent which are also generally investment in SDLs. As a result, total investment in government paper (CentreStates) is around 70 per cent. Scheduled Commercial Banks Central Government Securities, SDL and other approved securities. 23 per cent of net demand and time liabilities (NDTL). Urban Co-operative Banks Central Government Securities, SDL and other approved securities. 25 per cent of NDTL. DICGC Central Government Securities. 100 per cent of cash surplus. : The statutory liquidity ratio is marginally met through holdings of gold and cash as well. Table IV.3: SLR Maintenance by Banks (Per cent of NDTL) Financial Year End SLR Maintained SLR prescribed 2008-09 28.1 24 2009-10 28.8 25 2010-11 27.1 24 2011-12 27.4 24 2012-13 28.0 23 during 2009-10 (Chart IV.4). The resultant substitution from bank deposits to small savings eroded the effectiveness of the monetary transmission mechanism, especially the bank lending channel. To some degree, the annual reset for the small savings rates continues to provide them a competitive edge. Therefore, the option of a half-yearly or quarterly reset should be implemented. Chapter IV Addressing Impediments to Transmission of Monetary Policy 48 iii. Subventions IV.20 The Government also infl uences the monetary policy transmission channel through its directives to banks. Keeping some economically and socially important objectives in mind, both the Central and State Governments offer interest rate subvention to certain sectors, including agriculture (Table IV.4). There have also been non-interest subventions, such as the Agricultural Debt Waiver and Debt Relief Scheme in 2008. iv. Taxation IV.21 The tax advantage for the fi xed maturity plans (FMPs) of the debt Mutual Funds of tenors of a year or more against fixed deposits of corresponding maturities also weakens the credit channel of monetary transmission. Similarly, to the extent the fi nancial products of non-banks are not subjected to tax deduction at source, they have an advantage over bank deposits and weaken the transmission on the same grounds. Recommendations IV.22 In order to address specifi c impediments to monetary policy transmission in India, the Committee recommends the following: (a) Consistent with the time path of fiscal consolidation mentioned in Chapter II, SLR should be reduced to a level in consonance with the requirements of liquidity coverage ratio (LCR) prescribed under the Basel III framework. (b) Government should eschew suasion and directives to banks on interest rates that run counter to monetary policy actions. (c) More frequent intra-year resets of interest rates on small saving instruments, with built-in automaticity linked to benchmark G-sec yields, need to be brought in. Also, the benchmark should be based on average of the previous six months or even shorter intervals so as to better capture changes in interest rate cycles within a year. Table IV.4: Subvention Schemes in Force in the Last Two Years 1. Introduced in July 2007, there is an interest subvention on pre - and post-shipment rupee export credit for certain employment oriented export sectors. The subvention of two per cent for the fi nancial year 2013-14 was increased to three per cent with effect from August 1, 2013. The interest charged is, however, subject to a fl oor rate of seven per cent. Applicable to all banks and EXIM Bank. 2 In 2006-07, an interest subvention was introduced to ensure availability of short-term crop loans up to 3,00,000 to farmers at a reduced rate of seven per cent. This scheme continues with minor variations. In 2013-14, with three per cent additional subvention for timely repayment, the effective cost of short-term crop loan for farmers is four per cent. It was, until recently, applicable to public sector banks only, but now extended to private sector. 3. In October 2009, a scheme of one per cent interest subvention for housing loans up to 1 million was introduced. With enhancements, in 2013-14, the one per cent subvention is available for housing loans up to 1.5 million for the cost of a house up to 2.5 million. 4. In 2013-14, the Union Budget announced working capital and term loans at a concessional interest of six per cent to handloom weavers. This is supposed to benefi t 150,000 individual weavers and 1,800 primary cooperative societies (mostly women and those belonging to the backward classes) in 2013-14. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 49 (d) All fi xed income fi nancial products should be treated on par with bank deposits for the purpose of taxation and TDS. Further, the tax treatment of FMPs and bank deposits should also be harmonised. (e) With a sharp rise in the ratio of agricultural credit to agricultural GDP, the need for subventions on interest rate for lending to certain sectors would need to be re-visited27. 4.2. Large Informal Sector and Still Significant Presence of Informal Finance IV.23 Despite the growing reach of the formal banking and non-banking network, informal fi nance still caters to the fi nancing requirements of the major part of Indias population28. The recourse to non - institutional sources is relatively high, both in rural and urban areas, particularly by lower income groups. Also, the cost of borrowing from informal/semi-formal sources is signifi cantly higher than that of borrowing from banks (Table IV.5). High cost itself may be an impediment to transmission, particularly when incremental changes in the policy rate constitute only a small fraction of the overall funding costs. Thus, the signifi cant presence of informal fi nance as well as its costs of intermediation can impede the impact of monetary policy on aggregate demand. 4.3. Financial and Credit Market Frictions, Bank Behaviour and Monetary Policy IV.24 There are certain facets of monetary policy that interface with credit and fi nancial markets. In this context, market frictions and/or the endogenous response of the RBI to liquidity demand weaken monetary transmission. IV.25 First, on the lending side, banks determine their interest rates with reference to the base rate. While banks are free to decide their base rates, they are required to take into consideration factors like cost of funds, adjustment for the negative carry in respect of CRR and SLR, overhead cost and a profi t margin. The policy repo rate does not directly affect the determination of base rate of banks, except at the margin where wholesale funding is used. Even this role has greatly diminished, since wholesale funding (including borrowing from the Reserve Bank) constitute barely 10 per cent of the total funds raised by banks (Table IV.6). IV.26 Secondly, with regard to deposits, while interest rates are re-priced when policy rates increase, this is only at the margin. A more complete transmission is impeded by the maturity pattern being largely concentrated in fi xed tenor deposits (Table IV.7). Moreover, the distribution of term deposits is tilted in favour of longer duration (i. e. one year and above) deposits (Table IV.8). These fi xed rate deposits, together with the pursuit of infl exible net interest margins by public sector banks, imparts rigidity to the entire interest rate structure. Going forward, increase in competition as suggested by the 27 The ratio of outstanding agriculture loans to agriculture GDP increased from 9.5 per cent in the 1990s to 12.2 per cent in 2001-02, but subsequently rose sharply to 35.9 per cent in 2012-13. 28 According to the World Bank Findex Survey (2012), only 35 per cent of Indian adults have access to a formal bank account and 8 per cent borrowed formally in the last 12 months. Only 2 per cent of adults used an account to receive money from a family member living in another area and 4 per cent used an account to receive payment from the Government. Table IV.5: Cost of Credit from Various Agencies in India Lender Category Interest Rate (Per cent per annum) Self Help Groups (SHGs) 18-24 Microfi nance Institutions (MFIs) 20-24 Informal credit providers 18-36 Banks (small borrowal accounts) 6-20 : Data pertains to 2006. Source: Report on Currency and Finance, 2006-08, Reserve Bank of India. Chapter IV Addressing Impediments to Transmission of Monetary Policy 50 Reserve Bank is necessary to impart greater dynamism and fl exibility to the banking structure and associated outcomes (RBI, 2013)29. IV.27 Thirdly, the transmission of monetary policy to deposit and lending rates is sensitive to liquidity conditions prevailing at the time of a policy rate change and during the period thereafter. As shown in Table IV.9, cumulative increase of 175 bps in the repo rate in 2011-12 was transmitted to both deposit and lending rates, albeit less than proportionately. In 2012-13, however, the repo rate was cut by 100 bps, but despite the cut in CRR by 75 bps, deposit and lending rates did not soften much due to defi cit and occasionally tight liquidity conditions. In 2013-14 (so far), the cumulative increase in repo rate has been 25 bps, but in the absence of any CRR cuts and because of the policy induced tightness in liquidity conditions, transmission to the modal deposit rate has been higher than the change in the policy rate30. Empirical research for India corroborates the role of liquidity conditions in impacting the transmission monetary policy transmission is more effective during the liquidity defi cit mode as compared to the surplus mode (Ray and Prabhu, 2013)31. Signifi cant asymmetry is observed in the transmission of policy rate changes Table IV.6: Asymmetry in Transmission in Different Phases of Monetary Policy Cycles (to Deposit and Lending Rates of Banks) Change (percentage points) Tightening Phase (October 26, 2005 to October 19, 2008) Easing Phase (October 20, 2008 to March 18, 2010) Tightening Phase (March 19, 2010 to April 16, 2012) Easing Phase (April 17, 2012 to July 15, 2013) Repo Rate 3.00 -4.25 3.75 -1.25 Modal Deposit Rate 2.38 -2.38 2.31 0.04 Modal Base Rate 3.00 -2.00 2.75 -0.50 WALR N. A. N. A. 2.08 -0.49 : Base rate system was introduced from July 1, 2010. N. A.Not Available Table IV.7: Distribution of Current, Savings and Term Deposits-March 2012 (Per cent) Current Savings Term Total SBI and Associates 8.8 33.5 57.7 100.0 Nationalised Banks 9.1 23.4 67.5 100.0 Foreign Banks 29.2 15.4 55.3 100.0 Private Sector Banks 14.3 24.8 60.9 100.0 Source: Basic Statistical Returns, 2011-12. Table IV.8: Distribution of Maturity Pattern of Term Deposits of SCBs March 2012 Based on Contractual Maturity (Per cent) Up to 90 days 91 days and above but less than 6 months 6 months and above but less than 1 year 1 year and above but less than 2 years 2 years and above but less than 3 years 3 years and above but less than 5 years 5 years and above SBI and Associates 4.1 4.8 5.4 38.9 15.7 11.6 19.5 Nationalised Banks 6.6 6.5 11.8 49.9 6.7 10.9 7.6 Foreign Banks 34.3 12.7 9.8 34.9 3.9 3.6 0.8 Private Sector Banks 10.4 12.5 13.8 43.1 11.1 5.2 4.0 Source: Basic Statistical Returns, 2011-12. 29 RBI (2013): Discussion Paper on Banking Structure in India - The Way Forward, available on rbi. org. in/scripts/BSPressReleaseDisplay. aspxprid29405 30 Since deposit and lending rates may respond with different lags when the repo rate is changed, and given that liquidity is only one of the many determinants of transmission, direct comparison of deposit and lending rates relative to prevailing liquidity conditions may only provide broad indications of the link between liquidity conditions and transmission. 31 Ray, P. and E. Prabhu (2013), Financial Development and Monetary Policy Transmission Across Financial Markets: What Do Daily Data tell for India, RBI Working Paper, No. 4. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 51 between the surplus and defi cit liquidity conditions, suggesting that maintaining suitable liquidity environment is critical to yielding improved pass - through (Singh, 2011,op. cit.). Recommendations IV.28 Unless the cost of banks liabilities moves in line with the policy rates as do interest rates in money market and debt market segments, it will be diffi cult to persuade banks to price their loans in response to policy rate changes. Hence, it is necessary to develop a culture of establishing external benchmarks for setting interest rates based on which financial products can be priced. Ideally, these benchmarks should emerge from market practices. However, the Committee is of the view that the Reserve Bank could explore whether it can play a more active supportive role in its emergence. IV.29 The RBIs liquidity management operations should strive to ensure consistency with the stance of monetary policy. Accordingly, an increase in the policy rate to convey an anti-infl ation policy stance should be accompanied by tightening of liquidity condit ions through l iquidity management operations, whereas an easing of the policy stance should be associated with accommodative liquidity conditions. IV.30 The Committee is also of the view that there should be close coordination between the settings of monetary policy and macro-prudential policies, since variations in macro-prudential instruments such as capital buffers, provisions, loan-to-value ratios and the like impacts the cost structures and lendable resources of banks, thereby impacting monetary transmission. Table IV.9: Monetary Policy Transmission and Liquidity Conditions Period Change in Policy Rates (bps) Average Liquidity Defi cit ( billion) Modal Deposit Rate Modal Base Rate WALR Repo Rate CRR Q4 (2010-11) 50 - -464 6.65 9.00 11.40 2011-12 Q1 75 - -378 7.08 9.50 11.45 Q2 75 - -453 7.44 10.25 11.71 Q3 25 - -916 7.46 10.50 12.24 Q4 - -125 -1341 7.42 10.50 12.58 Change during the year 175 -125 -772 0.77 1.50 1.18 2012-13 Q1 -50 - -937 7.40 10.50 12.39 Q2 - -25 -543 7.29 10.45 12.30 Q3 - -25 -1046 7.33 10.25 12.18 Q4 -50 -25 -1101 7.31 10.20 12.18 Change during the year -100 -75 -907 -0.11 -0.30 -0.40 2013-14 Q1 -25 - -847 7.26 10.20 12.11 Q2 25 - -1007 7.46 10.25 12.21 Q3 25 - -856 7.65 10.25 12.15 Change up to Q3 25 - -903 0.34 0.05 -0.03 : Include Repo, Reverse Repo, Term repo, MSF and ECR : Data relate to November -. No change. Chapter IV Addressing Impediments to Transmission of Monetary Policy 52 4.4. Other Aspects of Monetary Policy Transmission i. High Infl ation and Financial Disintermediation IV.31 High infl ation in itself impedes transmission of monetary policy. This impact is exacerbated if interest rates on fi nancial products do not adjust to infl ation and yield negative returns. In India, gold and real estate compete with deposits, thereby constraining the degree of fl exibility available to banks, particularly in lowering the deposit rates (given the fear of loss of deposits) in an easing phase of monetary policy. For four consecutive years between 2009-10 and 2012- 13, average deposit rates remained below the CPI infl ation for those years, whereas the annual return from gold and real estate exceeded CPI infl ation most of the times, and by a signifi cant margin as well (Table IV.10). With the annual average consumer price inflation touching double digits or staying just underneath for the last six years, bank deposits have been yielding negative returns in real terms. ii. Endogenous Liquidity Under the Monetary Policy Framework IV.32 Under the extant monetary policy framework, financing of large fiscal deficits through market borrowings has effectively resulted in the use of open market operations (OMO) primarily to smoothen G-sec yields rather than being employed as a pure monetary policy tool, contrary to cross-country practices which have increasingly favoured the separation of debt management operations from liquidity management (Table IV.11). In India, on the other hand, transmission has been impeded by: (a) not enforcing enough liquidity management discipline in the banking system and (b) allowing excessive indirect monetisation of the fi scal defi cit which also undermines the credibility of discretionary liquidity management operations. The LAF framework allows banks complete freedom to access liquidity from the RBI at the repo rate, up to their excess SLR holdings. The cost of holding excess SLR gets refl ected in the pricing of other assets. IV.33 As government market borrowing crowds out funds to the private sector, in turn placing pressure on liquidity, the central bank is often forced to accommodate the resultant liquidity shortages by providing additional liquidity through open market operations, especially via outright purchases of G-secs. The net market borrowings of the central Government have increased 10-fold in the eight years till 2012-13, even without counting for additional funding of 1.16 trillion through 364-day treasury bills during the terminal year. Even in 2010-11, when monetary policy needed to be tightened aggressively and efforts were being made in that direction, large OMO purchases were effected. Refl ecting these developments, OMO transactions have largely become one-sided in recent years and have turned into a dominant source of reserve money creation rather than a tool for managing liquidity mismatches (Chart IV.5). While some expansion of reserve money consistent with the growth in broad money and nominal GDP is necessary (as set out under Pillar II in Chapter III), excessive monetary expansion at times results from indirect monetisation of the fi scal defi cit through OMOs. Table IV.10: Nominal Return on Gold, Real Estate and Bank Deposits (Per cent, y-o-y) Year Return on domestic gold price Return on real estate (RBIs House Price Index) CPI-IW Infl ation (Average) Weighted avg. term deposit rates of banks 2004-05 7.5 - 3.8 6.18 2005-06 12.3 - 4.4 6.51 2006-07 33.9 - 6.7 8.22 2007-08 8.2 - 6.2 8.71 2008-09 29.0 - 9.1 8.84 2009-10 22.2 11.7 12.4 6.97 2010-11 22.0 19.1 10.4 8.29 2011-12 33.8 22.3 8.4 7.40 2012-13 17.6 22.7 10.4 7.27 Apr-Oct 2013 -5.4 0.9 10.9 7.74 : End-March : Apr-Aug, 2013 : Apr-Nov, 2013 2013-14 q1 Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 53 IV.34 When the OMO cut-off yields in a given auction are lower than the cut-off yield in the immediately following primary auction of G-secs (Chart IV.6, Table IV.12), it creates opportunities for the banking system to profi t from the RBIs liquidity management operations. In 2012-13, in effect, 30 Table IV.11: Debt Management Arrangements: Cross-Country Practices in Some Emerging Market Economies Country Arrangements Country Arrangements Indonesia Government debt securities (T-bills and G-bonds) are issued by Ministry. Bank Indonesia (BI) as the implementing agency stipulates and administers the regulations regarding the issuance, sale and purchase of these instruments. Chile The International Finance Unit of the Ministry of Finance is in charge of proposing and implementing strategies regarding public debt through the Public Debt Offi ce (PDO). The Central Bank of Chile carries out monthly bond auctions on dates published in a calendar in the amounts established by the Finance Ministry. Brazil The National Treasury Secretariat is an agency of the National Treasury in charge of management and administration of domestic and external public debt. Most of the domestic government debt is issued through auctions held by National Treasury, making public offerings to fi nancial institutions. Mexico The Federal Government of Mexico, through the Ministry of Finance and Public Credit, is responsible for management and issuance of government securities. The Bank of Mexico operates as the fi nancial agent for the Federal Government and undertakes primary auctions of government securities on a weekly basis. Poland The Republic of Poland, via the Ministry of Finance on behalf of State Treasury, issued T-bills of upto one year and bonds of upto 10 years to cover the budget defi cit. The National Bank of Poland (NBP) can purchase T-bonds in the secondary market only exceptionally, in the case of a severe crisis, threatening domestic fi nancial stability. Hungary The Hungarian Government issues government bonds and discount T-bills, which was shifted out of the central bank in the late 1990s. The majority of government securities discount T-bills and G-bonds are sold through public issues. Turkey The Under Secretariat of the Treasury, which is the issuer of G-bonds and T-bills, is responsible for the method and terms of issuance as well as debt management. On behalf of the Under Secretariat, the Central Bank of the Republic of Turkey issues bonds and bills in accordance with the fi nancial services agreement with the Treasury. The CBRT is the central securities depository. South Africa The management of debt is vested with the National Treasury. The Treasury conducts weekly bond auctions according to a calendar published at the beginning of the fi scal year. Chapter IV Addressing Impediments to Transmission of Monetary Policy 54 Recommendations IV.35 Accordingly, the Committee recommends that OMOs have to be detached from fi scal operations and instead linked solely to liquidity management. OMOs should not be used for managing yields on government securities. IV.36 To sum up, there are several impediments that need to be taken on board for effective monetary transmission, some of which can be addressed through steps taken by the Reserve Bank itself. First and foremost, OMO purchases should be undertaken only when the liquidity condition warrants them. Second, the Reserve Bank should continue its efforts to develop the term repo market by calibrating liquidity at its overnight repo window as necessary. Third, the Reserve Bank should avoid regulatory forbearance, especially by changing norms for portfolio classifi cation when yields rise. Fourth, it should facilitate a more competitive and dynamic banking structure so that re-pricing of deposit and lending rates, in due course, becomes faster in response to RBIs monetary policy actions. Table IV.13: Indirect Monetisation Eases Crowding-out Pressures but affects Transmission of Changes in Repo Rate Year Net Market Borrowing (NMB) ( bn) RBI Support through Direct Subscription and OMO ( bn) RBI Support as per cent of NMB SCBs Support to NMB ( bn) SCBs Support as per cent of NMB Total Support from RBI and SCBs as per cent of NMB 1 2 3 4 5 6 746 2000-01 734 103 14 616 84 98 2001-02 908 -16 -2 711 78 77 2002-03 1041 -179 -17 1122 108 91 2003-04 889 -205 -23 1313 148 125 2004-05 509 -35 -7 642 126 119 2005-06 1062 -39 -4 -182 -17 -21 2006-07 1148 -51 -4 753 66 61 2007-08 1306 59 5 1826 140 144 2008-09 2470 945 38 1971 80 118 2009-10 3944 755 19 2226 56 76 2010-11 3264 672 21 1188 36 57 2011-12 4841 1342 28 2379 49 77 2012-13 5075 1545 30 2686 53 83 : Direct Subscription discontinued with effect from April 2006. Table IV.12: Comparison of Yields (OMOs versus Primary Auctions) Auction Date Weighted Average Cut off Yield (Per cent) OMO Auction First primary auction subsequent to OMO May 11, 2012 8.51 8.66 May 18, 2012 8.54 8.60 May 25, 2012 8.51 8.62 June 12, 2012 8.25 8.36 June 22, 2012 8.36 8.36 December 4, 2012 8.24 8.22 December 11, 2012 8.23 8.22 December 21, 2012 8.19 8.19 December 28, 2012 8.17 8.19 February 15, 2013 7.93 7.92 May 7, 2013 7.82 7.60 June 7, 2013 7.47 7.40 July 18, 2013 8.45 8.34 August 23, 2013 8.67 8.90 August 30, 2013 9.09 9.15 October 7, 2013 8.61 8.74 November 18, 2013 8.67 8.99 per cent of the net borrowing requirement of the Government was supported through OMOs (Table IV.13). Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 55 Chapter V Conduct of Monetary Policy in a Globalised Environment 1. Introduction V.1 The conduct of monetary policy in a globalised environment faces the challenge of managing the impossible trinity1. It has become more complicated by spillovers from monetary policies of advanced economies in recent years. Announcement effects of the exit from unconventional monetary policies (UMPs) of systemically important central banks have exposed the limits on the effectiveness of monetary policy in spillovers-receiving economies. Risk-on risk-off shifts in market perceptions have imparted heightened volatility to cross-border capital flows and to changes in asset prices worldwide. Furthermore, because of hysteresis, implications for the real economy (especially the tradable sector) are not symmetric over phases of infl ows and outfl ows. V. 2 Prior to the global crisis of 2008, there was an apparent consensus that fl exible exchange rates can engender the space for independent conduct of monetary policy, even if the capital account is open. After the crisis, however, there is a clear intellectual shift justifying a non-trivial role for capital flow management (CFM) measures to mitigate the externalities associated with global spillovers, irrespective of the exchange rate regime, and for a war-chest of international reserves as the fi rst and often, the only line of defence. Thus, the trilemma has collapsed into a dilemma independent monetary policy is possible only if the capital account is managed2,3. V.3 The dominant influence of US monetary policy on monetary policies of most EMEs has been evident since the onset of the global crisis. Quantitative easing (QE) led to the hardening of global commodity prices which has been transmitted to EMEs in the form of rising current account defi cits (CADs) and infl ation. QE has also been a strong push factor driving surges in capital flows into EMEs, causing their exchange rates to appreciate and asset prices to increase beyond levels regarded as tolerable hitherto. QE-driven capital inflows, in fact, also helped countries like India to meet the fi nancing gaps opened by sustained high CADs. Since May 2013, the effects of taper talk that became evident in sudden reversal in debt capital flows and sharp depreciation of exchange rates have added a whole new dimension to the conduct of monetary policy in an inter - connected world. This warranted a re-think on (a) degree of fl exibility that monetary authorities need to retain to manage large anticipated as well as unanticipated globalisation induced shocks and (b) the armoury of instruments and the associated costs in terms of achieving the fi nal objectives of monetary policy. 2. International Experience V.4 Over the last decade, trade, fi nance and sentiment channels have connected constituents of the global economy more than ever before. Repetitive episodes of crises have tended to focus attention on the negative effects of this integration relative to the gains. In particular, shocks emanating 1 An independent monetary policy is incompatible with a fi xed exchange rate and an open capital account. 2 Rey, H. (2013): Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence, Paper presented in the 2013 Economic Policy Symposium, Federal Reserve Bank of Kansas City, Jackson Hole, August 22 -24. 3 Farhi, E. and I. Werning (2013): Dilemma not Trilemma Capital Controls and Exchange Rates with Volatile Capital Flows, Paper presented at the Fourteenth Jacques Polak Annual Research Conference, International Monetary Fund, Washington D. C. November 7-8. Chapter V Conduct of Monetary Policy in a Globalised Environment 56 in AEs have amplified and prolonged risks to monetary and fi nancial conditions in EMEs, making macroeconomic management for the latter a testing challenge, especially in view of the large infl uence of capital fl ows on macroeconomic fundamentals (Table V.1)4. 2.1. Post-Global Crisis Country Experience on Managing Surges in Capital Infl ows V.5 Faced with rapid infl ows, Brazil imposed a two per cent tax (Imposto de Operacoes Financeiras or IOF) on portfolio (equity and debt) infl ows in October 2009 and subsequently raised it in phases to six per cent (Appendix Table V.1). In addition, it also raised unremunerated reserve requirements on time deposits from 15 per cent to 20 per cent in December 2010. In January 2011, it imposed reserve requirements on banks short dollar positions in the cash market. However, anticipating a drop in foreign infl ows once the US taper takes hold, Brazil scrapped the IOF tax in June 20135. V.6 Similarly, Peru introduced a gamut of measures during 2009-10. In July 2009, it enacted variants of controls on capital inflows to stem appreciation pressures (a ban on foreign purchases of central bank bills and increased fees on central bank liquidity draining instruments). In July 2010, it implemented additional capital requirements for forex credit risk exposure. Subsequently, in September, it imposed increased reserve requirements (to 75 per cent from 50 per cent earlier) on foreign currency deposits with maturity of less than two years and those on non-resident domestic currency deposits to 120 per cent (from 50 per cent earlier). V.7 Indonesia introduced a one-month minimum holding period requirement for central bank paper in June 2010. In November 2010, reserve requirements on local currency deposits were raised to eight per cent (from six per cent earlier). Subsequently, in December 2010, it raised the reserve requirements on foreign currency deposits (from one per cent to Table V.1: Impact of Capital Infl ows on Macroeconomic Variables Cross-country Comparisons Country Net infl ows ( of GDP) Currency Movements ( change in NEER) Change in reserves ( of GDP) Infl ation (: y-o-y) (average during 2006-08) Real credit growth (: y-o-y) (average of last six months) Brazil 6.2 38.4 6.0 5.0 (4.5) 12.9 Indonesia 2.6 19.4 7.4 6.2 (9.8) 9.2 Korea 1.9 17.5 10.7 3.3 (3.2) 0.4 Peru 5.9 5.6 9.0 2.1 (3.2) 9.3 Thailand 5.0 9.3 22.3 3.1 (4.1) 4.3 Turkey 6.9 6.5 1.7 7.9 (9.6) 21.4 South Africa 6.6 41.4 2.6 3.6 (6.4) -0.1 Czech Rep. 5.3 -0.8 -1.0 1.9 5.5 Poland 9.2 15.3 0.9 4.3 13.9 Period: Q3:2009-Q2:2010 for the other countries Period: Q2:2009-Q1:2011 Period: Q2:2009-Q2:2011 2011 over 2010. from the trough since the crisis Source: IMF documents, country pages and central bank websites. 4 IMF (2011): Recent Experiences in Managing Capital Infl ows Cross-Cutting Themes and Possible Policy Framework, February 14. Available at imf. org/external/np/pp/eng/2011/021411a. pdf, International Monetary Fund: Washington D. C. 5 Ostry, J. D. A. R. Ghosh, K. Habermeier, L. Laeven, M. Chamon, M. S. Qureshi and A. Kokenyne (2011): Managing Capital Flows: What Tools to Use, IMF Staff Discussion Note 6, International Monetary Fund: Washington DC. Forbes, K. M. Fratzscher and R. Straub (2013): Capital Controls and Macroprudential Measures: What are they Good For, MIT (Mimeo). Alichi A. S. Choo Ryul and C. Hong (2012): Managing Non-core Liabilities and Leverage of the Banking System: A Building Block for Macroprudential Policy Making in Korea. IMF Working Paper 27, International Monetary Fund: Washington D. C. Pradhan, M. R. Balakrishnan, R. Baqir, G. Heenan, C. Oner and S. Panth (2011) Policy Responses to Capital Flows in Emerging Markets. IMF Staff Discussion Note 10, International Monetary Fund: Washington D. C. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 57 eight per cent) and restricted short-term foreign borrowings by banks (to 30 per cent of capital), effective March 2011. V.8 In June 2010, Korea introduced ceilings on forex forward positions of banks to lower leverage and elongate banks funding structure. In January 2011, it re-introduced a 14 per cent withholding tax on non-residents purchase of treasury bonds. In August 2011, Korea also imposed a macro-prudential levy on non-core liabilities, with the extent of the levy being higher for non-core liabilities with shorter remaining maturity. V.9 Against the backdrop of high bond infl ows, Thailand announced the re-imposition of a withholding tax on non-resident interest earnings and capital gains in October 2010. Subsequently, in November 2010, it announced a cap on loan-to-value (LTV) ratio for residential property at 90 per cent on condominiums, effective January 2011, and 95 per cent on low rises, effective January 2012. V.10 In December 2010, Turkey reduced the withholding tax rate on bonds issued abroad by Turkish fi rms, with lower rates for longer maturities. Subsequently, it halted the practice of remunerating required reserves, raised the levy on interest on consumer loans and introduced LTV ratios for all mortgages. 2.2. Country Experience on Managing Sudden Capital Outfl ows V.11 The Feds taper announcement in May 2013 came as a major event shock for EMEs. As long-term US treasury yields hardened signifi cantly, there was a huge sell-off in bonds all over the globe. Asian markets came under intense pressure as the bond sell-off was accompanied by fl ight of capital back into the US. Bond yields firmed up across the globe (Chart V.1). Countries that ran large CADs became particularly vulnerable. Equity outfl ows followed, fi rst in portfolio and then in direct investment segments. The subsequent announcement in September 2013 of deferment of the QE program moderated near-term uncertainties to a large extent. Moreover, in recent weeks, fi nancial markets have been relatively calm even as the taper started in January. V.12 Despite limited headroom, EME central banks have undertaken steps to counter stock market slumps and sharp currency depreciation (Charts V.2 and V.3). While some central banks (such as in Brazil and Indonesia) responded in a conventional manner by raising policy rates and using foreign exchange reserves, others have experimented with a range of unconventional policy Chapter V Conduct of Monetary Policy in a Globalised Environment 58 measures. To illustrate, Brazil announced a US 60 billion currency intervention program in August 2013 involving swaps and repurchase agreements with businesses requiring dollars6. Turkeys central bank is reported to have sold US 6-8 billion in foreign currency auctions since June 2013. V.13 In June 2012, the BRICS initiated a plan to establish a US 100 billion fund in order to steady currency markets to address the potential fallout of taper spillovers, with participating members being able to draw a specified amount from the pool. Furthermore, countries have undertaken proactive measures towards rationalising non-essential imports in order to shrink their CADs. In June 2013, Brazil removed several capital controls, including taxes on foreign portfolio investments that were introduced in 2009. South Africa, in contrast, maintained an eclectic approach, favouring a market-determined exchange rate and maintaining an accommodative monetary policy stance.7 V.14 Faced with sudden capital outflows and adverse ramifi cations, several EMEs, including India, had to temporarily alter their conduct of monetary policy in addition to other measures. Some countries used short-term interest rates as the fi rst line of defence, while others focused more on managing liquidity. Some countries employed forex interventions in the spot and/or the forward market, while others relied more on forex swaps. Most countries resorted to capital account management, using a combination of measures to encourage capital inflows and discourage or temporarily restrict capital outfl ows (Appendix Table V.1). V.15 From this experience, it appears that for dealing with the challenges of globalisation-induced shocks: (a) a wide array of tools is available to central banks and the exact manner of using an instrument could vary (b) monetary measures may pursue different objectives simultaneously in the face of large and sustained spillovers without compromising the medium-term goal of price stability (c) forex swaps can be a good short-run tool but their effi cacy in the long-run is constrained by diffi culties in winding up swap positions and (d) forex intervention can give some respite, particularly when reserves are perceived to be adequate. 3. Indian Experience V.16 In recent years, India has faced episodes of surges in capital fl ows and sudden reversals and has used a combination of exchange rate fl exibility, capital controls, monetary measures, macro-prudential tools and reserves to manage them. Since 2002-03, India has faced four broad phases of volatile capital movements, each requiring different monetary policy 6 IMF (2013): Global Impact and Challenges of Unconventional Monetary Policies, IMF Policy Paper, October. Available at imf. org/external/np/ pp/eng/2013/090313.pdf, International Monetary Fund: Washington D. C. 7 In January 2014, the Bank of Japan and the RBI expanded the bilateral swap arrangement between Japan and India from US15 billion to US50 billion effective for three years from 2012 to 2015. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 59 responses8 (Chart V.4). During 2003-2007, capital infl ows were a major challenge for monetary policy. Coinciding with the global crisis of 2008, capital outfl ows and exchange market pressures necessitated unprecedented monetary easing to avert a fi nancial crisis and support a sluggish economy. In the years immediately after the global crisis, QE-induced capital fl ows helped to fi nance large current account defi cits over successive quarters from Q2:2009 to Q1:2013, but without accretion to reserves and with rising external liabilities (against the backdrop of an appreciating exchange rate in real terms). More recently, sudden and large outfl ows in response to taper talk since May 2013 required monetary policy to respond directly to exchange market pressures, including through the use of exceptional measures. 3.1. Monetary Policy Response to Surges in Capital Infl ows V.17 Over the period 2003-04 to 2006-07, high growth operated as a pull factor for surges in capital inflows, with easy global liquidity conditions providing the key push. Large infl ows in excess of the absorptive capacity of the economy created concerns about erosion in external competitiveness through exchange rate appreciation, possible overheating of the economy and asset price bubbles, besides the growing risk of an abrupt reversal. V.18 In response, a multi-pronged approach was followed which included, inter alia, phased liberalisation of current as well as capital account outfl ows exchange market intervention and partial sterilisation lowering of interest rate ceilings on NRI deposits management of external debt through pre - payment moderation in the access of corporates and intermediaries to external debt and greater fl exibility in exchange rate movements. V.19 Sterilising the liquidity impact of sustained accretions to reserves was the key monetary policy challenge, and a combination of higher CRR, reverse repos and open market operations under the Market Stabilisation Scheme (MSS)9 alongside some exchange rate appreciation was used for this purpose, which facilitated distribution of sterilisation costs across the fi nancial system, the Reserve Bank and the Government (Chart V.5). V.20 Reverse repos and outright OMO sales demanded the availability of adequate stock of government securities with the RBI, which became a constraining factor in sterilisation operations as the volume of capital inflows expanded. Moreover, reverse repo operations involved sterilisation costs, impacting the profi t of the RBI, with implications for RBIs operational independence. Using the LAF as an 8 During the period of surges in capital infl ows (2003-07), the real effective exchange rate of the rupee (REER-36 currency, trade based) appreciated by 11.7 per cent. In the immediate aftermath of the global crisis, refl ecting nominal depreciation of the rupee, the REER depreciated by 11.1 per cent between September 2008 and April 2009. Subsequently, between May 2009 to March 2013, the REER appreciated by 15.9 per cent using WPI as defl ator, largely refl ecting higher infl ation differential vis-a-vis the infl ation of Indias major trading partners. 9 The RBI in consultation with the Government of India introduced a new instrument of sterilisation, viz. the Market Stabilisation Scheme (MSS), which empowered the RBI to issue Government Treasury Bills and medium duration dated securities for the purpose of liquidity absorption. The scheme worked by impounding the proceeds of auctions of Treasury bills and Government securities in a separate identifi able MSS cash account maintained and operated by the RBI. The amounts credited into the MSS cash account were appropriated only for the purpose of redemption/buy back of the Treasury Bills/dated securities issued under the MSS. The introduction of MSS succeeded broadly in restoring the LAF to its intended function of daily liquidity management. Chapter V Conduct of Monetary Policy in a Globalised Environment 60 instrument of sterilisation tended to erode its utility as a day-to-day liquidity adjustment tool operating at the margin (RBI, 2003)10. It was in this context that the RBI introduced MSS11. As the subsequent experience showed, the MSS brought with it operational constraints that impacted the conduct of sterilisation.12 3.2. Monetary Policy Response to Inadequate Capital Infl ows/ Sudden Capital Outfl ows V.21 Three episodes of drying up of capital and/or reversals are discernible in the recent experience. First, during the Asian crisis and sanctions applied after the Pokhran nuclear tests, i. e. 1997 and 1998, the Indian rupee came under several bouts of pressure. Besides interventions in the spot and the forward segments of the forex market, monetary policy measures were used to tighten domestic liquidity and monetary conditions (Appendix Table V.2). In August 1998, the scheme of Resurgent India Bonds (RIBs) was launched to attract capital fl ows from the non-resident Indian diaspora. V.22 Second, the knock-on effects of the global fi nancial crisis required pre-emptive crisis prevention measures, primarily in the form of adequate assurance on making available both rupee and US dollar liquidity in the domestic markets. Despite exchange market pressures associated with capital outfl ows, interest rate defence of the exchange rate was not resorted to in view of the risks to fi nancial stability and growth. Moreover, there was a signifi cant moderation in WPI infl ation after the global fi nancial crisis, which was partly the result of the crisis-driven crash in global commodity prices. Unprecedented monetary easing over a short time span was the chosen response, facilitated by the headroom created by the gradual withdrawal of monetary accommodation from September 2004 to August 2008 in response to infl ation. With reverse repos, OMO sales, CRR cuts, unwinding of MSS balances and the opening up of special liquidity windows and lines of credit to apex refinancing institutions, the potential access to liquidity from the RBI was as high as around 10 per cent of GDP. V.23 Third, the large depreciation of the rupee after May 22, 2013 one of the highest among major EME currencies required actions on multiple fronts, driven by the urgency of curbing speculative pressures on the exchange rate, narrowing the CAD and fi nding exceptional external fi nancing. Taper - driven capital outfl ows primarily in the form of debt portfolio fl ows narrowed the spread between 10 Report of the Working Group on Instruments of Sterilisation (Chairperson: Usha Thorat), 2003. 11 The Reserve Bank had examined two other sterilisation options for India that would have required amendment to the RBI Act one, to provide for fl exibility in determination/remuneration of CRR balances so that interest could be paid on deposit balances of scheduled banks with the RBI and two, issuance of RBIs own paper, which was not favoured due to no sustainable progress on fi scal consolidation and the risk of market fragmentation stemming from issuing both Government papers and RBI paper. 12 The requirement to go periodically to the Government for limit increases in respect of securities provided under the scheme and the time lag involved in approval processes severely circumscribed the effectiveness of monetary policy in terms of timing of sterilisation operations. It also added to the fi scal costs. The issue of ring-fencing of funds that were raised through securities fl owing into the consolidated fund of India became a thorny legal issue. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 61 the G-sec yield and US Treasury yield signifi cantly the subsequent increase in money market interest rates and G-sec yields in response to monetary policy actions contributed to expectations of further depreciation, driven by uncovered interest rate parity conditions (Chart V.6, Appendix Tables V.3 and V.4). V.24 In sum, the Indian experience in managing the challenges of two-way capital fl ows over different phases suggests that: (a) monetary measures address spillovers only indirectly, and are contingent on their impact on the growth and inflation outlook, but monetary measures occasionally have to respond directly to the disruptive impact of capital fl ows on financial markets (b) the capacity of the RBI to sterilise/manage the domestic liquidity impact of net forex market interventions would have to be augmented signifi cantly in respect of both infl ows and outfl ows (c) text book interest rate defence of the exchange rate will have to be an instrument of the fi rst resort in order to buy time, but its use and sustainability has to be conditioned by the assessment of costs to the economy from rising interest rates and fi nancial stability considerations (d) if an external event entails the risk of a global recession which can dampen domestic growth prospects and raise fi nancial stability concerns, preparedness for a swift monetary easing may be necessary, even if the exchange rate comes under pressure without compromising the medium-term goal of price stability and (e) if the foreign exchange reserves are not perceived to be adequate, monetary measures to avert a free fall in the exchange rate may not be very effective. In these Chapter V Conduct of Monetary Policy in a Globalised Environment 62 conditions the risks of a failed monetary defence of the exchange rate may get heightened into snowballing consequences propelled by unidirectional expectations and herding. Recommendations V.25 In view of the cross country and Indian experience with global spillovers driving episodes of large and volatile capital infl ows as well as outfl ows, a fl exible setting of monetary policy by the RBI in the short-run is warranted. This presages readiness to use a range of instruments at its command, allowing fl exibility in the determination of the exchange rate while managing volatility through capital flow management (CFM) and macro-prudential measures (including sector specifi c reserve requirements) V.26 With regard to infl ows that are excessive in relation to external fi nancing requirements and the need for sterilised intervention: (a) the RBI should build a sterilisation reserve out of its existing and evolving portfolio of GoI securities across the range of maturities, but accentuated towards a strike capability to rapidly intervene at the short end and (b) the RBI should introduce a remunerated standing deposit facility, as recommended in Chapter-III, which will effectively empower it with unlimited sterilisation capability. V.27 As a buffer against outfl ows, the RBIs strategy should be to build an adequate level of foreign exchange reserves, adequacy being determined not only in terms of its existing metrics but also in terms of intervention requirements set by past experience with external shocks and a detailed assessment of tail events that materialised in the country experiences. As a second line of defence, swap arrangements, including with regional fi nancing initiatives, should be actively pursued. While retaining the fl exibility to undertake unconventional monetary policy measures as demonstrated in response to announcement effects of QE taper but with clarity in communication and better co-ordination, the Committee recommends that the RBI should respond primarily through conventional policy measures so as to ensure common set of shared expectations between the markets and the RBI, and to avoid the risk of falling behind the curve subsequently when the exceptional measures are unwound. V.28 In addition to the above, the RBI should engage proactively in the development of vibrant fi nancial market segments, including those that are missing in the spectrum, with regulatory initiatives that create depth and instruments, so that risks are priced, hedged, and managed onshore. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 63 Chapter VI Recommendations The recommendations of the Committee are set out in this Chapter. The Choice of Nominal Anchor (1) Infl ation should be the nominal anchor for the monetary policy framework. This nominal anchor should be set by the Reserve Bank as its predominant objective of monetary policy in its policy statements. 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 centered around the nominal anchor. Subject to the establishment and achievement of the nominal anchor, monetary policy conduct should be consistent with a sustainable growth trajectory and fi nancial stability (Para No: II.25). The Choice of Infl ation Metric (2) The RBI should adopt the new CPI (combined) as the measure of the nominal anchor for policy communication. The nominal anchor should be defi ned in terms of headline CPI infl ation, which closely reflects the cost of living and influences inflation expectations relative to other available metrics (Para No: II.36). Numerical Target and Precision (3) The nominal anchor or the target for infl ation should be set at 4 per cent with a band of /- 2 per cent around it (a) in view of the vulnerability of the Indian economy to supply/external shocks and the relatively large weight of food in the CPI and (b) the need to avoid a deflation bias in the conduct of monetary policy. This target should be set in the frame of a two-year horizon that is consistent with the need to balance the output costs of disinfl ation against the speed of entrenchment of credibility in policy commitment (Para No: II.42). Time Horizon for Attaining Price Stability (4) In view of the elevated level of current CPI infl ation and hardened infl ation expectations, supply constraints and weak output performance, the transition path to the target zone should be graduated to bringing down infl ation from the current level of 10 per cent to 8 per cent over a period not exceeding the next 12 months and to 6 per cent over a period not exceeding the next 24 month period before formally adopting the recommended target of 4 per cent infl ation with a band of /- 2 per cent. The Committee is also of the view that this transition path should be clearly communicated to the public (Para No: II.43). (5) Since food and fuel account for more than 57 per cent of the CPI on which the direct infl uence of monetary policy is limited, the commitment to the nominal anchor would need to be demonstrated by timely monetary policy response to risks from second round effects and infl ation expectations in response to shocks to food and fuel (Para No: II.44). Institutional Requirements (6) Consistent with the Fiscal Responsibility and Budget Management (Amendment) Rules, 2013, the Central Government needs to ensure that its fi scal defi cit as a ratio to GDP is brought down to 3.0 per cent by 2016-17 (Para No: II.47). (7) Administered setting of prices, wages and interest rates are significant impediments to monetary policy transmission and achievement of the price stability objective, requiring a commitment from the Government towards their elimination (Para No: II.48). Chapter VI Recommendations 64 Organisational Structure for Monetary Policy Decisions (8) Monetary policy decision-making should be vested in a monetary policy committee (MPC) (Para No: III.22). Monetary Policy Committee: Composition Tasks (9) The Governor of the RBI will be the Chairman of the MPC, the Deputy Governor in charge of monetary policy will be the Vice Chairman and the Executive Director in charge of monetary policy will be a member. Two other members will be external, to be decided by the Chairman and Vice Chairman on the basis of demonstrated expertise and experience in monetary economics, macroeconomics, central banking, fi nancial markets, public fi nance and related areas (Para No: III.23). (10) External members will be full time with access to information/analysis generated within the Reserve Bank and cannot hold any offi ce of profi t, or undertake any activity that is seen as amounting to confl ict of interest with the working of the MPC. The term of office of the MPC will ordinarily be three years, without prospect of renewal (Para No: III.24). (11) Each member of the MPC will have one vote with the outcome determined by majority voting, which has to be exercised without abstaining. Minutes of the proceedings of the MPC will be released with a lag of two weeks from the date of the meeting (Para No: III.25). (12) In view of the frequency of data availability and the process of revisions in provisional data, the MPC will ordinarily meet once every two months, although it should retain the discretion to meet and recommend policy decisions outside the policy review cycle (Para No: III.26). (13) The RBI will also place a bi-annual infl ation report in the public domain, drawing on the experience gained with the publication of the document on Macroeconomic and Monetary Developments. The Infl ation Report will essentially review the analysis presented to the MPC to inform its deliberations (Para No: III.27). (14) The Chairman, or in his absence the Vice Chairman, shall exercise a casting vote in situations arising on account of unforeseen exigencies necessitating the absence of a member for the MPC meeting in which voting is equally divided (Para No: III.28). Accountability of MPC (15) The MPC will be accountable for failure to establish and achieve the nominal anchor. Failure is defi ned as the inability to achieve the infl ation target of 4 per cent (/- 2 per cent) for three successive quarters. Such failure will require the MPC to issue a public statement, signed by each member, stating the reason(s) for failure, remedial actions proposed and the likely period of time over which infl ation will return to the centre of the inflation target zone (Para No: III.29). (16) With the establishment of the MPC, there would be a need to upgrade and expand analytical inputs into the decision making process through pre - policy briefs for MPC members, structured presentations on key macroeconomic variables and forecasts, simulations of suites of macroeconometric models as described in Chapter II, forward looking surveys and a dedicated secretariat. This will require restructuring and scaling-up of the monetary policy department (MPD) in terms of skills, technology and management information systems, and its reorganization (Para No: III.30). The Operating Framework of Monetary Policy (17) As an overarching prerequisite, the operating framework has to subserve stance and objectives of monetary policy. Accordingly, it must be redesigned around the central premise of a policy rule. While Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 65 several variants are available in the literature and in country practice, the Committee is of the view that a simple rule defi ned in terms of a real policy rate (that is easily communicated and understood), is suitable to Indian conditions and is consistent with the nominal anchor recommended in Chapter II. When infl ation is above the nominal anchor, the real policy rate is expected, on average, to be positive. The MPC could decide the extent to which it is positive, with due consideration to the state of the output gap (actual output growth relative to trend/potential) and to fi nancial stability (Para No: III.59). (18) A phased refinement of the operating framework is necessary to make it consistent with the conduct of monetary policy geared towards the establishment and achievement of the nominal anchor (Para No: III.60). Phase-I (19) In the fi rst or transitional phase, the weighted average call rate will remain the operating target, and the overnight LAF repo rate will continue as the single policy rate. The reverse repo rate and the MSF rate will be calibrated off the repo rate with a spread of (/-) 100 basis points, setting the corridor around the repo rate. The repo rate will be decided by the MPC through voting. The MPC may change the spread, which however should be as infrequent as possible to avoid policy induced uncertainty for markets (Para No: III.61). Liquidity Management (20) Provision of liquidity by the RBI at the overnight repo rate will, however, be restricted to a specifi ed ratio of bank-wise net demand and time liabilities (NDTL), that is consistent with the objective of price stability. As the 14-day term repo rate stabilizes, central bank liquidity should be increasingly provided at the 14-day term repo rate and through the introduction of 28-day, 56-day and 84-day variable rate auctioned term repos by further calibrating the availability of liquidity at the overnight repo rate as necessary (Para No: III.62). (21) The objective should be to develop a spectrum of term repos of varying maturities with the 14-day term repo as the anchor. As the term yield curve develops, it will provide external benchmarks for pricing various types of fi nancial products, particularly bank deposits, thereby enabling more efficient transmission of policy impulses across markets (Para No: III.63). (22) During this phase, the RBI should fi ne-tune and sharpen its liquidity assessment with a view to be in a position to set out its own assessment of banks reserves. This will warrant a juxtaposition of top - down approaches that estimate banks reserves demand consistent with macroeconomic and fi nancial conditions appropriate for establishing the nominal anchor, and bottom-up approaches that aggregate bank-wise assessments of liquidity needs submitted by banks themselves to the RBI on a daily basis. As these liquidity assessments become robust, they should be announced for market participants prior to the commencement of market operations every day and could be subjected to review and revision during the day for fi ne-tuning them with monetary and liquidity conditions. It is envisaged that the RBI will expand capabilities to conduct liquidity operations on an intra-day basis if needed, including by scaling up trading on the NDS-OM platform (Para No: III.64). (23) Consistent with the repo rate set by the MPC, the RBI will manage liquidity and meet the demand for liquidity of the banking system using a mix of term repos, overnight repos, outright operations and the MSF(Para No: III.65). Phase-II (24) As term repos for managing liquidity in the transition phase gain acceptance, the policy rate voted on by the MPC will be a target rate for the short end of the money market, to be achieved through Chapter VI Recommendations 66 active liquidity management. The 14-day term repo rate is superior to the overnight policy rate since it allows market participants to hold central bank liquidity for a relatively longer period, thereby enabling them to on lend/repo term money in the inter-bank market and develop market segments and yields for term transactions. More importantly, term repos can wean away market participants from the passive dependence on the RBI for cash/treasury management. Overnight repos under the LAF have effectively converted the discretionary liquidity facility into a standing facility that could be accessed as the fi rst resort, and precludes the development of markets that price and hedge risk. Improved transmission of monetary policy thus becomes the prime objective for setting the 14-day term repo rate as the operating target (Para No: III.66). (25) Based on its assessment of liquidity, the RBI will announce the quantity of liquidity to be supplied through variable rate auctions for the 14-day term repos alongside relatively fi xed amounts of liquidity provided through longer-term repos (Para No: III.67). (26) The RBI will aim at keeping 14-day term repo auction cut-off rates at or close to the target policy rate by supplementing its main policy operation (14-day term repos) with (i) two-way outright open market operations through both auctions and trading on the NDS-OM platform (ii) fi ne tuning operations involving overnight repos/reverse repos (with a fi ne spread between the repo and reverse repo rate) and (iii) discretionary changes in the CRR that calibrate bank reserves to shifts in the policy stance (Para No: III.68). (27) The MSF rate should be set in a manner that makes it a truly penal rate to be accessed only under exceptional circumstances (Para No: III.69). (28) An accurate assessment of borrowed and non-borrowed reserves and forward looking projections of liquidity demand would assume critical importance in the framework. So far, the governments cash balances have been the prime volatile autonomous driver of liquidity, making accurate liquidity projections a diffi cult task. Therefore, continuing with reforms in the Government securities market, which envisage that the debt management function should be with the Government, the cash management function should concomitantly also be with the Government (Para No: III.70). New Instruments (29) To support the operating framework, the Committee recommends that some new instruments be added to the toolkit of monetary policy. Firstly, to provide a fl oor for the new operating framework for absorption of surplus liquidity from the system but without the need for providing collateral in exchange, a (low) remunerated standing deposit facility may be introduced, with the discretion to set the interest rate without reference to the policy target rate. The introduction of the standing deposit facility (analogous to the marginal standing facility for lending purposes) will require amendment to the RBI Act for which the transitional phase may be utilised. The standing deposit facility will also be used for sterilization operations, as set out in Chapter 5, with the advantage that it will not require the provision of collateral for absorption which had turned out to be a binding constraint on the reverse repo facility in the face of surges in capital fl ows during 2005-08 (Para No: III.71). (30) Secondly, term repos of longer tenor may also be conducted since term repo market segments could help in establishing market based benchmarks for a variety of money market instruments and shorter - term deposits/loans (Para No: III.72). (31) Thirdly, dependence on market stabilisation scheme (MSS) and cash management bills (CMBs) may be phased out, consistent with Government debt and cash management being taken over by the Governments Debt Management Offi ce (DMO) (Para No: III.73). Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 67 (32) Fourthly, all sector specifi c refi nance should be phased out (Para No: III.74). Addressing Impediments to Transmission of Monetary Policy Statutory Liquidity Ratio (33) Consistent with the time path of fiscal consolidation mentioned in Chapter 2, SLR should be reduced to a level in consonance with the requirements of liquidity coverage ratio (LCR) prescribed under the Basel III framework. Para No: IV.22 (a). (34) Government should eschew suasion and directives to banks on interest rates that run counter to monetary policy actions Para No: IV.22 (b). Small Savings Schemes (35) More frequent intra-year resets of interest rates on small saving instruments, with built-in automaticity linked to benchmark G-sec yields, need to be brought in. Also, the benchmark should be based on the average of the previous six months or even shorter intervals so as to better capture changes in interest rate cycles within a year Para No: IV.22 (c). Taxation (36) All fi xed income fi nancial products should be treated on par with bank deposits for the purposes of taxation and TDS. Furthermore, the tax treatment of FMPs and bank deposits should also be harmonized Para No: IV.22 (d). Subventions (37) With a sharp rise in the ratio of agricultural credit to agricultural GDP, the need for subventions on interest rate for lending to certain sectors would need to be re-visited Para No: IV.22 (e). Financial Markets Pricing Benchmarks (38) Unless the cost of banks liabilities moves in line with the policy rates as do interest rates in money market and debt market segments, it will be diffi cult to persuade banks to price their loans in response to policy rate changes. Hence, it is necessary to develop a culture of establishing external benchmarks for setting interest rates out of which fi nancial products can be priced. Ideally, these benchmarks should emerge from market practices. The Reserve Bank could explore whether it can play a more active supportive role in its emergence (Para No: IV.28). (39) The RBIs liquidity management operations should strive to ensure consistency with the stance of monetary policy. Accordingly, an increase in the policy rate to convey an anti-infl ation policy stance should be accompanied by tightening of liquidity conditions through liquidity management operations, whereas an easing of the policy stance should be associated with accommodative liquidity conditions (Para No: IV.29). (40) There should be close coordination between the settings of monetary policy and macro-prudential policies, since variations in macro-prudential instruments such as capital buffers, provisions, loan - to-value ratios and the like alter the cost structures and lendable resources of banks, thereby impacting monetary transmission (Para No: IV.30). Open Market Operations (OMOs) (41) OMOs have to be detached from fiscal operations and instead linked solely to liquidity management. OMOs should not be used for managing yields on government securities (Para No: IV.35). Conduct of Monetary Policy in a Globalised Environment Managing Surges in Capital Infl ows/ Sudden Outfl ows (42) In view of the cross country and Indian experience with global spillovers driving episodes of large and volatile capital infl ows as well as outfl ows, a fl exible setting of monetary policy by the RBI in the short-run is warranted. This presages readiness to use a range of instruments at its command, allowing Chapter VI Recommendations 68 fl exibility in the determination of the exchange rate while managing volatility through capital flow management (CFM) and macro-prudential measures (including sector specific reserve requirements) (Para No: V.25). (43) With regard to infl ows that are excessive in relation to external fi nancing requirements and the need for sterilized intervention: (a) the RBI should build a sterilization reserve out of its existing and evolving portfolio of GoI securities across the range of maturities, but accentuated towards a strike capability to rapidly intervene at the short end and (b) the RBI should introduce a remunerated standing deposit facility, as recommended in Chapter-III, which will effectively empower it with unlimited sterilization capability (Para No: V.26). (44) As a buffer against outfl ows, the RBIs strategy should be to build an adequate level of foreign exchange reserves, adequacy being determined not only in terms of its existing metrics but also in terms of intervention requirements set by past experience with external shocks and a detailed assessment of tail events that materialised in the country experiences. As a second line of defence, swap arrangements, including with regional fi nancing initiatives, should be actively pursued. While retaining the fl exibility to undertake unconventional monetary policy measures as demonstrated in response to announcement effects of QE taper but with clarity in communication and better co-ordination, the Committee recommends that the RBI should respond primarily through conventional policy measures so as to ensure common set of shared expectations between the markets and the RBI, and to avoid the risk of falling behind the curve subsequently when the exceptional measures are unwound (Para No: V.27). (45) In addition to the above, the RBI should engage proactively in the development of vibrant fi nancial market segments, including those that are missing in the spectrum, with regulatory initiatives that create depth and instruments, so that risks are priced, hedged, and managed onshore (Para No: V.28). Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 69 Annex A Memorandum Expert Committee to Revise and Strengthen the Monetary Policy Framework It has been decided to constitute an Expert Committee to examine the current monetary policy framework of the Reserve Bank and recommend what needs to be done to revise and strengthen it with a view to, inter alia, making it transparent and predictable. The Committee will comprise: Dr. Urjit R. Patel Deputy Governor, RBI Chairman Dr. P. J. Nayak Member Dr. Chetan Ghate Associate Professor, Economics and Planning Unit, Indian Statistical Institute, New Delhi Member Dr. Peter J. Montiel Professor of Economics, Williams College, USA Member Dr. Sajjid Z. Chinoy Chief Economist and Executive Director J. P. Morgan Member Dr. Rupa Nitsure Chief Economist, Bank of Baroda Member Dr. Gangadhar Darbha Executive Director, Nomura Securities Member Shri Deepak Mohanty Executive Director, RBI Member Dr. Michael D. Patra Principal Adviser, MPD, RBI Member Secretary The Secretariat of the Committee will comprise Dr. Mridul Saggar, Director, Department of Economic and Policy Research, RBI, Shri Sitikantha Pattanaik, Director, Monetary Policy Department, RBI and Dr. Abhiman Das, Director, Department of Statistics and Information Management, RBI. The terms of reference of the Committee are: 1. To review the objectives and conduct of monetary policy in a globalised and highly inter-connected environment. 2. To recommend an appropriate nominal anchor for the conduct of monetary policy. 3. To review the organisational structure, operating framework and instruments of monetary policy, particularly the multiple indicator approach and the liquidity management framework, with a view to ensuring compatibility with macroeconomic and fi nancial stability, as well as market development. 4. To identify regulatory, fi scal and other impediments to monetary policy transmission, and recommend measures and institutional pre-conditions to improve transmission across fi nancial market segments and to the broader economy. 5. In respect of all of the above, to carefully consider the recommendations of previous Committees/ Groups. The Committee is expected to submit its report within three months. (Dr. Raghuram G. Rajan) Governor September 12, 2013 Annex 70 Memorandum Expert Committee to revise and strengthen Monetary Policy Framework In continuation of the Memorandum dated September 12, 2013 it has been decided to co-opt Dr. Praggya Das, Director, Monetary Policy Department (MPD) into the Secretariat of the Committee. Additionally, the following resource persons will assist in the work of the Committee: Name of the resource persons Department Snehal Harwadkar Rajesh Kavediya S. M. Lokare Asish Thomas George Abhilasha MPD Saurabh Ghosh Saibal Ghosh G. V. Nadhanael DEPR Sanjib Bordoloi Joice John DS1M (Urjit Patel) Deputy Governor September 27, 2013 Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 71 Annex B Consultation Meeting of the Committee with Economists/Analysts (Held on December 18, 2013) The Committee engaged in informal consultations with nine experts/economists/analysts (listed below) at a meeting held on December 18, 2013. 1) Professor Vikas Chitre 2) Professor Dilip Nachane 3) Professor Ashima Goyal 4) Dr. Renu Kohli 5) Dr. Soumya Kanti Ghosh 6) Dr. Ajit Ranade 7) Dr. Tushar Poddar 8) Mr. Chetan Ahya 9) Mr. Niranjan Rajadhyaksha The summary of discussions is organised around the key issues. (1) Nominal Anchor for Monetary Policy Two broad sets of views emerged on this issue: (a) abandon the current multiple indicator approach as it has no clear nominal anchor, and switch over to explicit infl ation targeting (IT), with infl ation as the nominal anchor and (b) continue with the current multiple indicator approach, despite lack of any explicit nominal anchor, as this framework draws on the high credibility earned by the RBI over years and allows fl exibility to the RBI to respond to multiple macro-fi nancial challenges. Those who supported the fi rst viewpoint argued that the current multiple indicator approach has failed to deliver price stability, primarily because of the pursuit of multiple objectives and the scope for time - inconsistent behaviour in the short-run. India is also the only major EME (excluding China) which has not yet adopted explicit infl ation targeting. Cross country experience of EMEs suggests that after switching over to IT, the performance on infl ation has generally improved. In this view, fl exible infl ation forecasting targeting was seen as appropriate with uncertainty surrounding infl ation projections accommodated by operating with an ex ante target, but allowing for discretionary response to shocks. In the case of demand shocks, the monetary policy response is obvious, but in the case of supply shocks, discretion will be critical because of the asymmetric impact on infl ation and growth. Accommodation of supply shocks is a matter of judgment and cannot be left to a simple rule. Those who favoured the second viewpoint underscored the point that the theoretical and empirical basis for IT is weak, and a switch over to IT in India driven entirely by the infl ation experience of the last few years must be preceded by clarifi cation on how IT will be made consistent with exchange rate stability and fi nancial stability. Some also suggested that there must be clarity on how a new framework would respond to asset prices, unlike the ambiguity in the current framework. There was a view that a nominal anchor alone may not guarantee price stability, since the RBI had adopted monetary targeting in the past, but that regime was not any way better in terms of performance on price stability. A nominal anchor, therefore, could work only if fi scal policy works in tandem with monetary policy. Annex 72 (2) Choice of the Infl ation Metric Views were divided on this issue, with some favouring headline CPI, and others supporting a core measure of CPI that is sensitive to changes in monetary policy. The key arguments against a core measure of CPI were: (a) the importance of food and fuel in the consumption basket in India (b) food and fuel also refl ect the impact of demand pressures and not just the impact of supply constraints and (c) transmission of food and fuel infl ation to infl ation expectations and wage setting behaviour. The arguments against the use of headline CPI infl ation included: (a) the all-India CPI is a new index and its properties particularly its relationship with other variables are not very clear (b) there are macro risks of shifting to the new CPI at a time when growth is weak and the political environment is uncertain the key risk is of raising interest rate signifi cantly, conditioned by the high CPI infl ation but, possibly, not being able to lower infl ation despite a strong anti-infl ationary stance (c) public preference in a democracy matters and people may accept higher infl ation if that helps in higher growth. All supported the need for a robust infl ation expectations survey, and measures to deepen the market for infl ation indexed bonds so as to obtain market based information on infl ation expectations. It was felt that this will help improve understanding of relationships between CPI or its specifi c components and infl ation expectations. (3) The Infl ation Target There was a view that the RBI already has an implicit infl ation target often communicated in terms of 5 per cent as its comfort level. What may be required under a new framework, therefore, is clarity on single versus multiple objectives and accountability on attaining the target. Others felt that setting the target level is not an easy choice. Some suggested careful calibration of the time path over which the target may be pursued, being mindful of disinfl ation costs. Others were of the view that comparing the Mexican and Brazilian experience would suggest that Mexico has a lower infl ation target (which does not allow much scope to accommodate supply shocks), therefore, its performance on price stability is better. In contrast, Brazil has a higher infl ation target, which leaves scope for accommodating supply shocks, leading to relatively higher average infl ation. (4) Who should set the Infl ation Target The view was that the target must be set by the RBI and not the Government contrary to what is recommended by the FSLRC. The prime argument is incentive incompatibility, i. e. the Government may set a low infl ation target, but ensure neither independence for the RBI nor fi scal prudence, thereby making the target unattainable for the RBI. (5) Impediments to Transmission of Monetary Policy One view highlighted uncertainty surrounding monetary policy transmission in India as a key factor that could constrain performance evaluation and hence fi xing accountability under IT. If the action to outcome relationship is uncertain, persisting with the multiple indicator approach may be acceptable. A counter view was that the switch over to IT cannot wait for a well defi ned and understood transmission process Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 73 to evolve. In this context, the example of Brazil was presented to suggest that countries have migrated to an IT regime without being constrained by transmission weaknesses and lack of clarity on how to anchor infl ation expectations. On improving transmission, one view underscored the need to develop the term money market, another view suggested adding borrowings from the RBI to the calculation of the base rate. There was also a view that the large and growing size of the parallel economy may be a major impediment to transmission. (6) Liquidity Management It was highlighted that in a period of falling productivity, more provision of liquidity may not be a solution to the growth slowdown. The RBI should track productivity trends and must recognise that liquidity injected at negative real interest rates must be used productively otherwise it will be infl ationary. One view emphasised that liquidity conditions are more important than even the repo rate, and a policy of keeping the system in permanent liquidity defi cit mode need not be ideal for all phases of the business cycle. Another view underscored the obvious connection between liquidity and asset prices and suggested that the new framework must recognise this. (7) Other Issues During the discussions several other specifi c points were highlighted, such as: (a) fl exibility in the framework to respond to spillovers from the monetary policy stance of the reserve currency country (i. e. the US) and (b) use of credit policy as an adjunct to monetary policy aimed at addressing supply constraints and (c) use of macro-prudential policies for fi nancial stability objectives. Annex 74 Annex 1 The Relationship between CPI-Combined and WPI The relationship between WPI and CPI was examined based on monthly data from January 2000 to December 2013, for Food and Core (non-food non-fuel) parts separately. For this, the variables were initially seasonally adjusted using X-12-ARIMA technique. The inter-relationship was tested using Granger Causality and SVAR framework. First difference of the log of seasonally adjusted data was used. A. Investigating the relationship between CPI-Combined Food and WPI-Food Dependent variable Independent variable Test statistic Remark Dlog(WPIfood) Dlog(CPIfood) 9.62 (0.02) Bidirectional causality Dlog(CPIfood) Dlog(WPIfood) 8.58 (0.04) Figures in parentheses are p-values. The optimum lag length is 2. Conclusion: Impact of an increase in WPI-food infl ation on CPI-Combined food infl ation is signifi cant and leads to increase in CPI-Combined food till two months, while an increase in CPI-Combined food infl ation leads to a corresponding increase in WPI-food infl ation. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 75 B. Investigating the relationship between CPI-Combined Core and WPI-Core Here core is defi ned as headline CPI/WPI excluding Food Fuel. Dependent variable Independent variable Test statistic Remark Dlog(WPICore) Dlog(CPICore) 3.29 (0.35) No evidence of existence of causality between WPI-Core and CPI-Core. Dlog(CPICore) Dlog(WPICore) 3.23 (0.36) Figures in parentheses are p-values. The optimum lag length is 3. Conclusion: No signifi cant impact of WPI-Core on CPI-Combined Core and vice versa. Annex 76 Annex 2 Correlation Between Measures of Infl ation and Infl ation Expectations Both WPI and CPI-Combined series are highly correlated with 3-month ahead infl ation expectations. However, in both cases, movement has been directionally different at times. 1-year ahead and 3-month ahead infl ation expectations and their relationship with food and fuel infl ation CPI-IW Infl ation and Household Infl ation Expectations (IESH) Sample period: 2008:Q3 to 2013:Q2 Total panel (balanced) observations: 140 Dependent Variable IESH 1-year ahead IESH 3-month ahead Constant 0.16 (1.17) 0.16 (1.15) CPI-IW Food 0.11 (2.01) 0.13 (2.22) CPI-IW Fuel and Lighting 0.18 (4.18) 0.16 (3.83) CPI-IW excluding Food and Fuel 0.13 (1.70) 0.09 (1.15) Adjusted R-squared 0.12 0.10 S. E. of regression 1.60 1.60 F-statistic 7.33 6.22 Prob(F-statistic) 0.00 0.00 Note. Figures in parentheses denote t-values. Coeffi cient signifi cant at 1 per cent 5 per cent and 10 per cent levels. Note: All the panel regressions were carried out using fi rst differences of the variables. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 77 WPI Infl ation and Household Infl ation Expectations (IESH) Sample period: 2008:Q3 to 2013:Q2 Total panel (balanced) observations: 140 Dependent Variable IESH 1-year ahead IESH 3-month ahead Constant 0.24 (2.05) 0.22 (1.83) WPI - Food Items 0.02 (0.42) 0.03 (0.53) WPI-Fuel Group 0.22 (5.16) 0.24 (5.46) WPI-Non-food Manufactured Products -0.15 (-1.09) -0.23 (-1.76) Adjusted R-squared 0.34 0.32 S. E. of regression 1.39 1.39 F-statistic 24.64 22.65 Prob(F-statistic) 0.00 0.00 Note: Figures in parentheses denote t-values. Coeffi cient signifi cant at 1 per cent 5 per cent and 10 per cent levels. Note: All the panel regressions were carried out using fi rst differences of the variables. Annex 78 Annex 3 Estimation of Threshold Infl ation Estimates of Threshold Infl ation from Past Empirical Studies Study Period Threshold Infl ation (Per cent) Methodology Chakravarty Committee Report (1985) 4 Rangarajan (1998) 6 Macro Econometric Model Kannan and Joshi (1998) 1981-96 6-7 Vasudevan, Bhoi and Dhal (1998) 1961-98 5-7 Correlation/regression Samantaraya and Prasad (2001) 1970-99 6.5 Report on Currency and Finance (2001) 1970-2000 5 Sarels Spline Method Singh and Kalirajan (2003) 1971-98 No Threshold Spline regression Bhanumurthy and Alex (2010) 1975-2005 5 - 5.5 Spline regression Singh, Prakash (2010) 1970-2009 6 Spline regression RBI Annual Report 2010-11 4 - 6 Spline regression, non-linear least squares and Logistic Smooth Transition Regression (LSTR) model. Pattanaik and Nadhanael (2013) 1972-2011 6 Spline regression, non-linear approach, vector auto regression (VAR) IMF (2012) 1996-2012 5-6 Mohanty et al (2011) 1996-2011 4-5.5 Spline regression, non-linear least squares and Logistic Smooth Transition Regression (LSTR) model. Subbarao (2013) 1996-2012 4.4-5.7 Spline regression, non-linear least squares and Logistic Smooth Transition Regression (LSTR) model. cited as accepted rate of rise in prices Rangarajan(1996) observed that the objective of policy should be to keep infl ation rate around 6 per cent. Using monthly data for January 2000 to April 2007, they suggested 4-4.5 per cent as the threshold. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 79 1. Univariate approach A Logistic Smooth Transition Regression (LSTR) model proposed by Tersvirta (19941 19982) is used to estimate the infl ation threshold (Espinoza et al. (2010)3 ) The model specifi cation is as proposed by McAleer Medeiros (2008)4 which employs a quasi maximum likelihood (QML) estimator of smooth transition regression with multiple regimes.5 where Quarterly data from 1996-97 to 2012-13 is used in the analysis. Apart from infl ation and lagged values of GDP growth, a control variable capturing world GDP growth is also used. GDP growth for OECD countries is used as proxy for world GDP data. The impact of domestic factors is controlled using GDP lags. LSTR coeffi cients of Regression Parameters WPI as measure of infl ation CPI C as measure of infl ation -0.63 (1.25) 2.13 (1.09) 1.72 (0.56) 0.59 (0.20) -1.39 (1.42) -0.35 (0.47) (y t1) 0.23 (0.13) 0.17 (0.12) (y t4) 0.20 (0.13) 0.14 (0.12) (WGDP t1) 0.36 (0.29) 0.16 (0.24) Infl ation threshold 5.8 (0.61) 6.7 (0.20) 0 1 ( ) M i i i y W X e ( ( ) 1 (1 )iiW e 1 Tersvirta, T.(1994) Specifi cation, Estimation, and Evaluation of Smooth Transition Autoregressive Models, Journal of the American Statistical Association, Vol. 89, pp. 208218. 2 Tersvirta, T. (1998) Modelling Economic Relationships with Smooth Transition Regressions, in Handbook of Applied Economic Statistics, ed. by A. Ullah and D. E. Giles, pp. 507-552, New York: Marcel Dekker. 3 Espinoza, R. Leon, H. Prasad, A. (2010) Estimating the Infl ation-Growth Nexus A Smooth Transition Model IMF Working Paper, WP/10/76 4 McAleer M. Medeiros, M. C. (2008). A multiple regime smooth transition Heterogeneous Autoregressive model for long memory and asymmetries Journal of Econometrics 147, pp 104-119 5 Matlab codes developed by Marcelo C. Medeiros available at sites. google/site/marcelocmedeiros/Home/codes Note. Figures in parentheses denote standard errors. Annex 80 2. Multivariate Approach A Threshold Vector Auto Regression (TVAR) is a non-linear multivariate system of equations. TVARs approximate the non-linear relationship by several regime-dependent formulations which are linear. Each regime is defi ned in terms of threshold values and coeffi cients of the VAR system are specifi c to each regime. The system of equations that is estimated for the reduced-form VAR with one threshold is given by Yt C1 1(L)Yt (C2 2(L)Yt) I(-d ) t Where Y and is the infl ation threshold. , GDP, and USD are annualized month-on - month seasonally adjusted growth rates in the price index (WPI or CPI), real GDP and Re/ exchange rate, respectively. Call is the weighted average call money rate representing monetary policy. The estimation is done using quarterly data from 1996-97 to 2012-13. The chart indicates that in the case of both WPI and CPI-Combined, infl ation above threshold reduces out - put growth. Cross-country Threshold Infl ation Rates Country Threshold Infl ation (Per cent) Country Threshold Infl ation (Per cent) Armenia 4.5 New Zealand 3 China 2.5 Nigeria 11.2-12 Ghana 11 South Africa 4 Indonesia 8.5- 11 USA 2.5 Mexico 9 India 4-6 Source: Compiled from different empirical studies. 6 Julia Schmidt (2013) Country risk premia, endogenous collateral constraints and non-linearities: A Threshold VAR approach Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 81 Annex 4 Average CPI Infl ation during Near Zero Output-gap Alternative methods of estimation of the output gap (univariate and multivariate) suggest that the output gap was near zero during the period from 2003-04:Q3 and 2006-07:Q1. During the same period, CPI-Com - bined infl ation was at around 4.0 per cent. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 83 Anchor Advantages Disadvantages Monetary targeting Some monetary aggregates can be quickly and easily controlled by the central bank. Depends on a well-defi ned and stable relationship between monetary aggregates and nominal income. With fi nancial innovations, this stability often breaks down. Monetary aggregates can be accurately measured (with short lags). Greater stress on making policy transparent (clear, simple and understandable) and on regular communication with the public may undermine credibility in the face deviations. Increases the transparency of monetary policy, thereby avoiding the t ime - inconsistency trap. Nominal income targeting It could be superior to monetary targeting, since it avoids the problem of velocity shocks and time inconsistency. Compels a central bank to announce a potential GDP growth number, over which it has limited control. Allows a country to maintain independent monetary policy. Concept of nominal GDP is not clearly understood by the public, lowering transparency. Could engender time inconsistency if the central bank announces too low or too high a number, which subsequently is found to be different from the announced one. Exchange rate targeting The nominal anchor of the exchange rate fi xes the infl ation rate for internationally traded goods and thus, contributes directly to keeping infl ation in check. The central bank has limited control over its monetary policy. If the exchange rate target is credible, it anchors inflation expectations to the infl ation rate in the anchor country to whose currency it is pegged. The country becomes vulnerable to shocks emanating from the country to which its currency is pegged. Has the advantage of simplicity and clarity well understood by the public. Speculative attacks on the exchange rate might force the central bank to substantially raise its interest rates, with signifi cant economic costs. Infl ation targeting Preserves independence of monetary policy. Too much focus on infl ation often at the cost of output stabilisation. Provides a nominal anchor for the path of price level. Long and variable lags in monetary transmission means that a substantial amount of time must elapse before the success of monetary policy can be ascertained. (Contd. ) Appendix Table II.1: Nominal Anchors Pros and Cons 84 Appendix Tables Anchor Advantages Disadvantages Clear and simple hence, well-understood by the public. Effi cacy could be compromised if interest rates hit a zero lower bound. Transparency increases the potential for promoting low infl ation expectations, which helps to produce a desirable inflation outcome. A rigid rule does not allow enough headroom (discretion) to respond fl exibly to unforeseen contingencies. Price level targeting Lowers uncertainty about prices that would prevail in the near future. Poses communication challenges. Under this approach, the central bank, at a minimum, needs to specify both an intercept (level of target in the base period) and a slope (rate of increase in target price path over time), over and above a time period. Allows economic agents to form forward - looking expectations, based on current price levels. Not practical experience on the success or failure of its implementation across countries in modern times1. Can prove effective when nominal interest rates hit the zero lower bound. The transition costs of moving to this practice (for countries already on infl ation targeting) could be large and uncertain. Just-do-it strategy Constructive ambiguity in policy making often helps central bank achieve its long - term goal (price stability). Non transparent not clear to the public what the central bank intends to do (or, is doing). Demonstrated success. Strongly dependent on skills and preferences of individuals in charge of the central bank. 1 In 1931, Sweden went off the gold standard and adopted a price-level target in order to counter defl ationary pressures associated with the Great Depression (C. Berg and L. Jonung, 1999. Pioneering Price Level Targeting: The Swedish Experience 1931-1937, Journal of Monetary Economics 43, 525-51). Appendix Table II.1: Nominal Anchors Pros and Cons (Concld.) Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 85 C ou nt ry Si nc e w he n Pr ev io us / w hy in fl at io n ta rg et in g W ho s et s th e Ta rg et /g oa l in de pe nd en ce Ta rg et in di ca to r, t im e fr am e an d st yl e Fr eq ue nc y of M ee ti ng K ey p ol ic y ra te / O pe ra ti on al ta rg et / in st ru m en ta l in de pe nd en ce A ny o th er c om m en ts Au st ra lia 19 93 N on e/ Pr ov id e a ne w m on et ar y an ch or Re se rv e Ba nk Bo ar d in ag re em en t w it h G ov er no r an d th e M in is te r of Fi na nc e (T re as ur er ) Ta rg et r an ge o f 2- 3 pe r ce nt in fl a ti on o n av er ag e ov er th e ec on om ic cy cl e. M ed iu m t er m N or m al ly m ee ts 11 t im es e ac h ye ar. o n th e fi r st T ue sd ay o f ea ch m on th (n o m ee ti ng in Ja nu ar y) Ta rg et c as h ra te /I nt er ba nk c as h ra te In d et er m in in g m on et ar y po lic y, t he B an k ha s a du ty t o m ai nt ai n pr ic e st ab ili ty. f ul l em pl oy m en t, a nd t he ec on om ic p ro sp er it y an d w el fa re o f th e Au st ra lia n pe op le. C an ad a 19 90 - 19 91 N on e/ Pr ov id e a ne w m on et ar y an ch or a nd br in g do w n in fl a ti on Th e in fl a ti on ta rg et s ar e ag re ed jo in tl y by t he G ov er nm en t of C an ad a an d th e Ba nk o f C an ad a A t ar ge t ra te f or to ta l C PI o f 2 pe r ce nt o n a 12 - m on th b as is. w it h a 1- 3 pe r ce nt c on tr ol ra ng e. T he cu rr en t ta rg et ra ng e ex te nd s to D ec em be r 20 16 In la te 2 00 0, th e Ba nk o f C an ad a ad op te d a sy st em o f ei gh t pr e - se t da te s pe r ye ar on w hi ch it an no un ce s it s ke y po lic y ra te. Th e Ba nk ca rr ie s ou t m on et ar y po lic y by in fl u en ci ng sh or t-t er m in te re st r at es. I t do es t hi s by ra is in g an d lo w er in g th e ta rg et f or t he ov er ni gh t ra te. T he B an k al so m on it or s a se t of co re in fl a ti on m ea su re s, in cl ud in g th e C PI X. w hi ch s tr ip s ou t ei gh t of t he m os t vo la ti le C PI c om po ne nt s. T he se c or e m ea su re s al lo w th e Ba nk t o l oo k th ro ug h t em po ra ry ch an ge s in t ot al C PI in fl a ti on a nd t o fo cu s on th e un de rl yi ng t re nd o f in fl a ti on. w hi ch is a g oo d in di ca to r of w he re t ot al C PI in fl a ti on is h ea de d in th e ab se nc e of p ol ic y ac ti on. A pp en di x Ta bl e II .2 A. I nfl a ti on T ar ge ti ng C ou nt ri es A dv an ce d Ec on om ie s (C on td. ) 86 Appendix Tables C ou nt ry Si nc e w he n Pr ev io us / w hy in fl at io n ta rg et in g W ho s et s th e Ta rg et /g oa l in de pe nd en ce Ta rg et in di ca to r, t im e fr am e an d st yl e Fr eq ue nc y of M ee ti ng K ey p ol ic y ra te / O pe ra ti on al ta rg et / in st ru m en ta l in de pe nd en ce A ny o th er c om m en ts Ja pa n Ja nu ar y 20 13 Th e A ct s ta te s, T he B an k of Ja pa n s au to no m y re ga rd in g cu rr en cy a nd m on et ar y co nt ro l s ha ll be re sp ec te d. su ffi c ie nt ly . Pr ic e st ab ili ty ta rg et o f 2 pe r ce nt in t er m s of th e ye ar - o n - ye ar r at e of ch an ge in t he C PI a t th e ea rl ie st po ss ib le t im e, w it h a ti m e ho ri zo n of ab ou t tw o ye ar s. M on et ar y Po lic y M ee ti ng s (M PM s) a re he ld o nc e or tw ic e a m on th. fo r on e or t w o da ys. D is cl os ur e vi a pr es s re le as es. m in ut es o f th e m ee ti ng s, p re ss co nf er en ce. Th e Ba nk co nt ro ls t he am ou nt o f fu nd s in t he m on ey m ar ke t, m ai nl y th ro ug h m on ey m ar ke t op er at io ns. Th e Ba nk s up pl ie s fu nd s to fi na nc ia l i ns ti tu ti on s by. f or e xa m pl e, ex te nd in g lo an s to t he m. w hi ch a re b ac ke d by co lla te ra l s ub m it te d to th e Ba nk b y th es e in st it ut io ns. S uc h an op er at io n is c al le d a fu nd s - su pp ly in g op er at io n. N ew Ze al an d 19 89 -9 0 N on e/ Pa rt o f ex te ns iv e re fo rm s, di ss at is fa ct io n w it h ea rl ie r ou tc om es pr ov id e a ne w no m in al a nc ho r Th e M in is te r of Fi na nc e an d th e G ov er no r of th e Re se rv e Ba nk s ha ll to ge th er h av e a se pa ra te ag re em en t se tt in g ou t sp ec ifi c ta rg et s fo r ac hi ev in g an d Th e cu rr en t ag re em en t, si gn ed in Se pt em be r 20 12. c al ls f or in fl a ti on t o be ke pt w it hi n 1 to 3 p er ce nt a ye ar. o n av er ag e ov er th e m ed iu m te rm. w it h a Ei gh t s ch ed ul ed de ci si on m ak in g m ee ti ng s in a ye ar. O ffi c ia l c as h ra te (O C R) - t he w ho le sa le p ri ce of b or ro w ed m on ey. Th e Re se rv e Ba nk pu bl is he s it s M on et ar y Po lic y St at em en t (M PS ) qu ar te rl y. E ac h M on et ar y Po lic y St at em en t m us t se t ou t: 1) h ow t he R es er ve Ba nk p ro po se s to a ch ie ve it s ta rg et s 2 ) h ow it pr op os es t o fo rm ul at e an d im pl em en t m on et ar y po lic y du ri ng t he n ex t fi v e ye ar s a nd 3 ) h ow A pp en di x Ta bl e II .2 A. I nfl a ti on T ar ge ti ng C ou nt ri es A dv an ce d Ec on om ie s (C on td .) Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 87 C ou nt ry Si nc e w he n Pr ev io us / w hy in fl at io n ta rg et in g W ho s et s th e Ta rg et /g oa l in de pe nd en ce Ta rg et in di ca to r, t im e fr am e an d st yl e Fr eq ue nc y of M ee ti ng K ey p ol ic y ra te / O pe ra ti on al ta rg et / in st ru m en ta l in de pe nd en ce A ny o th er c om m en ts m ai nt ai ni ng pr ic e st ab ili ty. Th is is k no w n as t he P ol ic y Ta rg et s A gr ee m en t (P TA ). fo cu s on ke ep in g fu tu re av er ag e in fl a ti on n ea r th e 2 pe rc en t ta rg et m id po in t. T he Re se rv e Ba nk ha s pu bl is he d an in te ra ct iv e in fl a ti on ca lc ul at or o n it s w eb si te. m on et ar y po lic y ha s be en im pl em en te d si nc e th e la st M on et ar y Po lic y St at em en t. N or w ay 20 01 Ex ch an ge r at e / gr ad ua l m ov em en t to w ar ds fl ex ib le ex ch an ge r at e an d st ro ng er em ph as is o n pr ic e st ab ili ty Th e G ov er nm en t ha s se t an in fl a ti on t ar ge t fo r m on et ar y po lic y. T he op er at io na l ta rg et o f m on et ar y po lic y sh al l b e an nu al co ns um er p ri ce in fl a ti on o f cl os e to 2 .5 p er ce nt o ve r ti m e. T he E xe cu ti ve Bo ar d se ts t he ke y ra te a t pr e - an no un ce d ti m es. n or m al ly si x ti m es a ye ar. K ey p ol ic y ra te. w hi ch is t he in te re st r at e on ba nk s d ep os it s in N or ge s Ba nk. Th e N or ge s Ba nk s f oc us is o n pr ic e st ab ili ty. fi n an ci al s ta bi lit y an d ge ne ra ti ng a dd ed v al ue th ro ug h in ve st m en t m an ag em en t. A pp en di x Ta bl e II .2 A. I nfl a ti on T ar ge ti ng C ou nt ri es A dv an ce d Ec on om ie s (C on td .) 88 Appendix Tables C ou nt ry Si nc e w he n Pr ev io us / w hy in fl at io n ta rg et in g W ho s et s th e Ta rg et /g oa l in de pe nd en ce Ta rg et in di ca to r, t im e fr am e an d st yl e Fr eq ue nc y of M ee ti ng K ey p ol ic y ra te / O pe ra ti on al ta rg et / in st ru m en ta l in de pe nd en ce A ny o th er c om m en ts Sw ed en An no un ce d in Ja nu ar y 19 93. ad op te d in 1 99 5 Ex ch an ge r at e / Fo rc ed o ff a fi x ed e xc ha ng e ra te r eg im e Th e Ex ec ut iv e Bo ar d of t he Ri ks ba nk m ak es t he m on et ar y po lic y de ci si on s w it ho ut in st ru ct io n fr om a ny o th er pa rt ie s. 2 pe r ce nt ta rg et in a nn ua l ch an ge in he ad lin e C PI Th e Ex ec ut iv e Bo ar d ho ld s si x sc he du le d m on et ar y po lic y m ee ti ng s a ye ar. O ve rn ig ht r ep o ra te / O ve rn ig ht r ep o ra te t ar ge t Th e Ri ks ba nk s f un ct io n is t o ke ep in fl a ti on c lo se to t he g oa l o f 2 pe r ce nt. If t he c re di bi lit y of t hi s in fl a ti on t ar ge t is n ot th re at en ed. t he R ik sb an k ca n m ak e fu rt he r co nt ri bu ti on s to r ed uc in g va ri at io ns in a re as s uc h as p ro du ct io n an d em pl oy m en t - t he r ea l ec on om y. So ut h K or ea A pr il 19 98 Ba se d on B an k of K or ea A ct. i t se ts t he m id - te rm in fl a ti on ta rg et t o be ap pl ie d fo r th re e ye ar s in co ns ul ta ti on w it h th e go ve rn m en t. T he in fl a ti on ta rg et m ea su re du ri ng t he pe ri od f ro m 20 13 t o 20 15 is se t at 2. 5 3. 5. ba se d on c on su m er pr ic e in fl a ti on (y ea r - on - y ea r). Th e Ba se R at e, th e BO K s po lic y ra te. i s se t du ri ng t he m ai n m ee ti ng of t he M on et ar y Po lic y C om m it te e th at ta ke s pl ac e on ce e ve ry m on th. Th e Ba nk o f K or ea B as e R at e is t he r ef er en ce po lic y ra te. In a dd it io n, t he B an k of K or ea a ls o gi ve s ex pl an at io n to t he ge ne ra l p ub lic a s to t he st at us o f th e m ed iu m te rm in fl a ti on t ar ge t by m on it or in g it o n an an nu al b as is. A pp en di x Ta bl e II .2 A. I nfl a ti on T ar ge ti ng C ou nt ri es A dv an ce d Ec on om ie s (C on td .) Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 89 C ou nt ry Si nc e w he n Pr ev io us / w hy in fl at io n ta rg et in g W ho s et s th e Ta rg et /g oa l in de pe nd en ce Ta rg et in di ca to r, t im e fr am e an d st yl e Fr eq ue nc y of M ee ti ng K ey p ol ic y ra te / O pe ra ti on al ta rg et / in st ru m en ta l in de pe nd en ce A ny o th er c om m en ts U K O ct ob er 19 92 Ex ch an ge r at e In fl a ti on ta rg et in g Fo rc ed o ff a fi x ed e xc ha ng e ra te r eg im e to m ai nt ai n pr ic e st ab ili ty / P ri ce s ta bi lit y is d efi n ed b y th e G ov er nm en t s in fl a ti on t ar ge t of 2 . Th e in fl a ti on ta rg et o f 2 pe r ce nt is ex pr es se d in te rm s of a n an nu al r at e of in fl a ti on b as ed on t he C on su m er Pr ic es In de x (C PI ). M on et ar y Po lic y C om m it te e m ee ts m on th ly fo r a tw o - da y m ee ti ng. D ec is io ns a re m ad e by a v ot e of t he C om m it te e on a on e - pe rs on on e - vo te b as is. Th e 19 98 B an k of E ng la nd A ct m ad e th e Ba nk in de pe nd en t to se t in te re st ra te s. B an k ra te is b ei ng u se d si nc e 20 09 as se t pu rc ha se as a n ad di ti on al in st ru m en t. In A ug us t 20 13 t he M PC pr ov id ed s om e ex pl ic it gu id an ce r eg ar di ng t he fu tu re c on du ct o f m on et ar y po lic y. T he M PC in te nd s at a m in im um t o m ai nt ai n th e pr es en t hi gh ly st im ul at iv e st an ce o f m on et ar y po lic y un ti l ec on om ic s la ck h as b ee n su bs ta nt ia lly r ed uc ed. pr ov id ed t hi s do es n ot en ta il m at er ia l r is ks t o pr ic e st ab ili ty o r fi n an ci al st ab ili ty. A pp en di x Ta bl e II .2 A. I nfl a ti on T ar ge ti ng C ou nt ri es A dv an ce d Ec on om ie s (C on cl d. ) 90 Appendix Tables C ou nt ry Si nc e w he n Pr ev io us / an y ta rg et o th er th an in fl at io n ta rg et in g W ho s et s th e Ta rg et / G oa l in de pe nd en ce Ta rg et in di ca to r, ti m ef ra m e an d st yl e Fr eq ue nc y of M ee ti ng K ey p ol ic y ra te / O pe ra ti on al ta rg et / In st ru m en ta l in de pe nd en ce A ny o th er co m m en ts Eu ro a re a To m ai nt ai n pr ic e st ab ili ty is t he p ri m ar y ob je ct iv e of t he Eu ro sy st em a nd of t he s in gl e m on et ar y po lic y fo r w hi ch it is re sp on si bl e. Th is is la id do w n in t he Tr ea ty o n th e Fu nc ti on in g of th e Eu ro pe an U ni on. A rt ic le 12 7 (1 ). th e G ov er ni ng C ou nc il. pr ic e st ab ili ty is d efi n ed a s a y ea r - on - y ea r in cr ea se in t he H ar m on is ed In de x of C on su m er Pr ic es (H IC P) fo r th e eu ro ar ea o f be lo w 2 pe r ce nt. P ri ce st ab ili ty is t o be m ai nt ai ne d ov er th e m ed iu m te rm . Tw ic e a m on th. w it h fi r st d ay di sc us si ng ov er al l as se ss m en t of th e ec on om ic si tu at io n an d th e ri sk s to pr ic e st ab ili ty ba se d on a co m pr eh en si ve ec on om ic a nd m on et ar y an al ys is in t he co nt ex t of t he EC B s (t w o - pi lla r) m on et ar y po lic y st ra te gy. M in im um ra te in m ai n re fi n an ci ng op er at io n (M RO ) a nd t he in te re st r at es on t he m ar gi na l le nd in g fa ci lit y an d th e de po si t fa ci lit y. Th e Eu ro sy st em c ur re nt ly ac ce pt s a ve ry b ro ad ra ng e of d eb t in st ru m en ts. is su ed bo th b y pu bl ic an d pr iv at e is su er s. Sw it ze rl an d Th e Sw is s N at io na l Ba nk (S N B) im pl em en ts it s m on et ar y po lic y by fi xi ng a t ar ge t ra ng e fo r th e th re e - m on th A rt ic le 9 9 of th e Fe de ra l C on st it ut io n en tr us ts t he SN B, a s an in de pe nd en t ce nt ra l b an k, w it h th e SN B eq ua te s pr ic e st ab ili ty w it h a ri se in th e na ti on al co ns um er p ri ce in de x of le ss th an 2 p er c en t pe r an nu m in Q ua rt er ly m ee ti ng s (M ar ch. J un e, Se pt em be r an d D ec em be r) w it h pr es s re le as e an d bu lle ti n pu bl ic at io n. C H F 3- m on th Li bo r. M ed iu m - te rm in fl a ti on fo re ca st s. A pp en di x Ta bl e II .2 B: N on - i nfl a ti on T ar ge ti ng C ou nt ri es A dv an ce d Ec on om ie s (C on td. ) Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 91 C ou nt ry Si nc e w he n Pr ev io us / an y ta rg et o th er th an in fl at io n ta rg et in g W ho s et s th e Ta rg et / G oa l in de pe nd en ce Ta rg et in di ca to r, ti m ef ra m e an d st yl e Fr eq ue nc y of M ee ti ng K ey p ol ic y ra te / O pe ra ti on al ta rg et / In st ru m en ta l in de pe nd en ce A ny o th er co m m en ts Sw is s fr an c Li bo r. co nd uc t of m on et ar y po lic y in t he in te re st s of t he c ou nt ry as a w ho le. te rm s of t ot al C PI. Si ng ap or e Ea rl y 19 80 s C en tr ed o n th e m an ag em en t of th e ex ch an ge ra te. Th e ex ch an ge ra te p ol ic y ba nd is p er io di ca lly re vi ew ed t o en su re t ha t it r em ai ns co ns is te nt w it h th e un de rl yi ng fu nd am en ta ls o f th e ec on om y. Th e ob je ct iv e of S in ga po re s ex ch an ge r at e po lic y ha s al w ay s be en to p ro m ot e su st ai ne d an d no n - in fl a ti on ar y gr ow th f or th e Si ng ap or e ec on om y. Re gu la r m on et ar y po lic y an no un ce m en ts ar e sc he du le d in A pr il an d O ct ob er. Th e tr ad e - w ei gh te d ex ch an ge r at e is a llo w ed t o fl u ct ua te w it hi n a po lic y ba nd. an d w he re ne ce ss ar y, M on et ar y Au th or it y of Si ng ap or e (M A S) co nd uc ts d ir ec t in te rv en ti on s in t he f or ei gn ex ch an ge m ar ke t to m ai nt ai n th e ex ch an ge r at e w it hi n th is ba nd. M A S m on et ar y po lic y is ce nt re d on t he m an ag em en t of th e ex ch an ge ra te r at he r th an t ar ge ti ng in te re st r at e le ve ls. A pp en di x Ta bl e II .2 B: N on - i nfl a ti on T ar ge ti ng C ou nt ri es A dv an ce d Ec on om ie s (C on td .) 92 Appendix Tables C ou nt ry Si nc e w he n Pr ev io us / an y ta rg et o th er th an in fl at io n ta rg et in g W ho s et s th e Ta rg et / G oa l in de pe nd en ce Ta rg et in di ca to r, ti m ef ra m e an d st yl e Fr eq ue nc y of M ee ti ng K ey p ol ic y ra te / O pe ra ti on al ta rg et / In st ru m en ta l in de pe nd en ce A ny o th er co m m en ts U ni te d St at es N o fo rm al ta rg et / Th e C om m it te e ju dg es t ha t in fl a ti on a t th e ra te o f 2 pe r ce nt. a s m ea su re d by th e an nu al ch an ge in t he pr ic e in de x fo r pe rs on al co ns um pt io n ex pe nd it ur es. i s m os t co ns is te nt ov er t he lo ng er ru n. St at ut or y M an da te f ro m th e C on gr es s. M ax im um em pl oy m en t, st ab le p ri ce s, an d m od er at e lo ng - te rm in te re st r at es. FO M C m ee ti ng s an d pr es s co nf er en ce. D ec is io n by co ns en su s/ E ig ht s ch ed ul ed pe r ye ar. w it h ot he rs a s ne ed ed / M ee ti ng s m ay la st o ne o r tw o da ys. In t he m os t re ce nt pr oj ec ti on s, FO M C pa rt ic ip an ts es ti m at es o f th e lo ng er - r un no rm al r at e of un em pl oy m en t ha d a ce nt ra l te nd en cy o f 5. 2- 6. 0 pe r ce nt. So ur ce. B IS M C C om pe nd iu m. P et ur ss on (2 00 4). m on th ly b ul le ti n, H an db oo k of C en tr al B an ki ng. 2 9, B an k of E ng la nd. d if fe re nt c en tr al b an k w eb si te s ti ll Ja nu ar y 10. 2 01 4 A pp en di x Ta bl e II .2 B: N on - i nfl a ti on T ar ge ti ng C ou nt ri es A dv an ce d Ec on om ie s (C on cl d. ) Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 93 C ou nt ry Si nc e w he n Pr ev io us / w hy in fl at io n ta rg et in g W ho s et s th e Ta rg et / op er at io na l in de pe nd en ce Ta rg et in di ca to r, ti m ef ra m e an d st yl e Fr eq ue nc y of M ee ti ng K ey p ol ic y ra te A ny o th er co m m en ts Pe rf or m an ce on in fl at io n C hi le Se pt em be r 19 99 H ig h in fl a ti on d ue t o ex pa ns io na ry p ol ic ie s, oi l p ri ce h ik e du ri ng G ul f w ar. f ai lu re w it h ex ch an ge r at e ba se d st ab ili sa ti on pr og ra m m e, in st ab ili ty of m on ey d em an d an d di ffi c ul ty in m on et ar y ta rg et in g, p ro vi de a ne w m on et ar y an ch or a nd g ra du al di si nfl a ti on. C en tr al b an k/ Ye s A nn ua l C PI (h ea dl in e) Po in t ta rg et. 3 pe r ce nt / /- 1 pe rc en ta ge po in t/ A ro un d 2 ye ar s. M on et ar y Po lic y Re po rt / 4 ti m es a ye ar. M on et ar y Po lic y In te re st R at e (O ve rn ig ht in te rb an k ra te ). Br az il Ju ne 1 99 9 D ue t o co nc er ns o n fi s ca l f ro nt. c ol la ps e of c ur re nc y un de r sp ec ul at iv e at ta ck a nd se ar ch f or a n om in al an ch or w it hi n IM F pr og ra m m e. N at io na l M on et ar y C ou nc il (b ot h G ov t an d ce nt ra l b an k G ov er no r) / Ye s H ea dl in e Br oa d N at io na l C PI / 4. 5 pe r ce nt /- 2 pe rc en ta ge po in t Ye ar ly t ar ge t. In fl a ti on Re po rt / 4 ti m es a ye ar A n ov er ni gh t in te re st r at e (S EL IC ) H un ga ry Ju ne 2 00 1 In cr ea si ng in co m pa ti bi lit y of fi xe d ex ch an ge ra te r eg im e an d di si nfl a ti on n ee d to br in g do w n in fl a ti on w it h fu tu re E U m em be rs hi p in m in d C en tr al b an k/ Ye s C PI / 3 pe r ce nt pe r an nu m / M ed iu m - te rm. Q ua rt er ly Re po rt o n In fl a ti on / 4 ti m es a ye ar. In te re st r at e on 2 - w ee k ce nt ra l b an k bo nd. A pp en di x Ta bl e II .3. I nfl a ti on T ar ge ti ng C ou nt ri es E m er gi ng M ar ke t Ec on om ie s (C on td. ) 94 Appendix Tables C ou nt ry Si nc e w he n Pr ev io us / w hy in fl at io n ta rg et in g W ho s et s th e Ta rg et / op er at io na l in de pe nd en ce Ta rg et in di ca to r, ti m ef ra m e an d st yl e Fr eq ue nc y of M ee ti ng K ey p ol ic y ra te A ny o th er co m m en ts Pe rf or m an ce on in fl at io n In do ne si a Ju ly 2 00 5 Th e re la ti on sh ip be tw ee n m on et ar y ag gr eg at es a nd no m in al in co m e be co m in g te nu ou s du e to in st ab ili ty in in co m e ve lo ci ty of m on ey f ol lo w in g fi n an ci al d er eg ul at io n an d le ss s uc ce ss w it h ex ch an ge r at e as no m in al a nc ho r. G ov er nm en t in c on su lt at io n w it h ce nt ra l ba nk / Ye s. C PI / 4. 5 pe r ce nt /- 1 pe rc en ta ge po in t/ M ed iu m - te rm. M on et ar y Po lic y Re po rt / 4 ti m es a ye ar. BI r at e. Is ra el In fo rm al ly in 1 99 2 fu ll - fl e dg ed fr om Ju ne 19 97 Lo ck in d is in fl a ti on an d de fi n e th e sl op e of t he e xc ha ng e ra te cr aw lin g pe g. G ov er nm en t. in c on su lt at io n w it h ce nt ra l ba nk G ov er no r/ Ye s. C PI / Ta rg et R an ge o f 1- 3 pe r ce nt / W it hi n 2 ye ar s. In fl a ti on Re po rt / Tw ic e a ye ar. Sh or t-t er m in te re st r at e (o ve rn ig ht tr an sa ct io ns be tw ee n ce nt ra l b an k an d ba nk s). M ex ic o 20 01 D if fi c ul ty w it h m on et ar y ta rg et in g, un re lia bi lit y of re la ti on sh ip b et w ee n m on et ar y ba se a nd in fl a ti on. a nd la ck of n om in al a nc ho r to g ui de in fl a ti on ex pe ct at io ns. Th e Bo ar d of G ov er no rs / Ye s. C PI / M ul ti - an nu al in fl a ti on ta rg et 3 pe r ce nt /-1 p er ce nt / M ed iu m - te rm. In fl a ti on Re po rt / 4 ti m es a ye ar. O ve rn ig ht in te r - ba nk ra te. A pp en di x Ta bl e II .3. I nfl a ti on T ar ge ti ng C ou nt ri es E m er gi ng M ar ke t Ec on om ie s (C on td .) Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 95 C ou nt ry Si nc e w he n Pr ev io us / w hy in fl at io n ta rg et in g W ho s et s th e Ta rg et / op er at io na l in de pe nd en ce Ta rg et in di ca to r, ti m ef ra m e an d st yl e Fr eq ue nc y of M ee ti ng K ey p ol ic y ra te A ny o th er co m m en ts Pe rf or m an ce on in fl at io n So ut h A fr ic a Fe br ua ry 20 00 Fo llo w in g lib er al is at io n an d st ru ct ur al de ve lo pm en ts. ch an gi ng r el at io ns hi p be tw ee n ou tp ut. p ri ce s an d m on ey g ro w th. m ak in g m on et ar y ta rg et in g le ss u se fu l ne ed f or g re at er tr an sp ar en cy in p ol ic y. G ov er nm en t in c on su lt at io n w it h ce nt ra l ba nk / Ye s. C PI / A T ar ge t ra ng e of 3 -6 pe r ce nt / O n a co nt in uo us ba si s. M on et ar y Po lic y Re vi ew / Tw ic e a ye ar. Re po r at e. Pe ru Ja nu ar y 20 02 Fo rm al is at io n of ea rl ie r re gi m e g re at er tr an sp ar en cy o f po lic y. Ta rg et is ap pr ov ed b y th e Bo ar d of D ir ec to rs. C PI / 2 pe r ce nt /-1 pe rc en ta ge po in t/ A t al l t im es. In fl a ti on Re po rt / 4 ti m es a ye ar. Re fe re nc e in te re st r at e. Ph ili pp in es Ja nu ar y 20 02 Fo rm al is at io n an d si m pl ifi ca ti on o f ea rl ie r re gi m e gr ea te r tr an sp ar en cy an d fo cu s on p ri ce st ab ili ty. G ov er nm en t in c on su lt at io n w it h ce nt ra l ba nk /Y es. C PI / 4 pe r ce nt /- 1 pe rc en ta ge po in t fo r 20 12. 2 01 3 an d 20 14 / M ed iu m - te rm. In fl a ti on Re po rt / 4 ti m es a ye ar K ey P ol ic y in te re st ra te s fo r ov er ni gh t re po / r ev er se re po a nd te rm r ep o/ re ve rs e re po an d sp ec ia l de po si t ac co un ts. Ta rg et is an no un ce d 2 ye ar s in ad va nc e. A pp en di x Ta bl e II .3. I nfl a ti on T ar ge ti ng C ou nt ri es E m er gi ng M ar ke t Ec on om ie s (C on td .) 96 Appendix Tables C ou nt ry Si nc e w he n Pr ev io us / w hy in fl at io n ta rg et in g W ho s et s th e Ta rg et / op er at io na l in de pe nd en ce Ta rg et in di ca to r, ti m ef ra m e an d st yl e Fr eq ue nc y of M ee ti ng K ey p ol ic y ra te A ny o th er co m m en ts Pe rf or m an ce on in fl at io n Po la nd 19 98 C on si de re d th e m os t ef fe ct iv e w ay t o br in g do w n in fl a ti on as a p re co nd it io n fo r su bs eq ue nt E U m em be rs hi p. M on et ar y Po lic y C ou nc il/ Ye s. C PI / 2. 5 pe r ce nt /- 1 pe rc en ta ge po in ts / M ed iu m - te rm. In fl a ti on Re po rt / 3 ti m es a ye ar Re fe re nc e ra te (t he ra te t ha t de te rm in es th e yi el d on th e m ai n O M O s). So ut h K or ea A pr il 19 98 U ns ta bl e m on ey de m an d fo llo w in g st ru ct ur al c ha ng es in fi n an ci al m ar ke ts. a nd w it h 19 97 fi na nc ia l cr is is d is co nt in ua ti on of e xc ha ng e ra te. C en tr al B an k in c on su lt at io n w it h th e G ov t. / Ye s. C PI / 3 pe r ce nt /- 1 pe rc en ta ge po in t/ 3 ye ar s. M on et ar y Po lic y Re po rt / Tw ic e a ye ar. Ba nk o f K or ea B as e ra te. Th ai la nd M ay 2 00 0 In fl a ti on t ar ge ti ng co ns id er ed m or e ap pr op ri at e w it h fl o at in g ex ch an ge r at e th an m on ey s up pl y ta rg et in g af te r th e fi n an ci al c ri si s of 1 99 7. M PC in co ns ul ta ti on w it h th e G ov t. / Ye s. 3. 0 pe r ce nt /- 1. 5 pe rc en ta ge po in ts / 8 qu ar te rs. In fl a ti on Re po rt / 4 ti m es a ye ar. O ne d ay re po r at e. Ta rg et is se t b y M PC an nu al ly. Th e ta rg et de ci de d in ag re em en t w it h th e M in is te r of F in an ce. w hi ch th en re qu ir es ap pr ov al by th e Ca bi ne t. A pp en di x Ta bl e II .3. I nfl a ti on T ar ge ti ng C ou nt ri es E m er gi ng M ar ke t Ec on om ie s (C on td .) Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 97 C ou nt ry Si nc e w he n Pr ev io us / w hy in fl at io n ta rg et in g W ho s et s th e Ta rg et / op er at io na l in de pe nd en ce Ta rg et in di ca to r, ti m ef ra m e an d st yl e Fr eq ue nc y of M ee ti ng K ey p ol ic y ra te A ny o th er co m m en ts Pe rf or m an ce on in fl at io n Tu rk ey Ja nu ar y 20 06 M PC in co ns ul ta ti on w it h th e G ov er nm en t. A nn ua l C PI / 5 pe r ce nt /-2 pe rc en ta ge po in ts f or 20 12. 2 01 3 an d 20 14 / M ul ti - y ea r ho ri zo n 3 ye ar s. In fl a ti on Re po rt / 4 ti m es a ye ar. O ne w ee k re po a uc ti on ra te. In te re st ra te co rr id or an d re qu ir ed re se rv e ra ti os a ls o us ed a s po lic y in st ru - m en ts. So ur ce. 1. P et ur ss on T. G. (2 00 5). I nfl a ti on T ar ge ti ng a nd i ts E ff ec ts o n M ac ro ec on om ic P er fo rm an ce , S U ER F st ud ie s: 2 00 5/ 5 - Th e Eu ro pe an M on ey a nd F in an ce F or um. V ie nn a. 2. H am m on d G. ( 20 12 ): S ta te o f th e A rt o f In fl a ti on T ar ge ti ng , C C BS. H an db oo k N o. 29. B an k of E ng la nd. A pp en di x Ta bl e II .3. I nfl a ti on T ar ge ti ng C ou nt ri es E m er gi ng M ar ke t Ec on om ie s (C on cl d. ) 98 Appendix Tables Appendix Table II.4A: Individual Countries Infl ation Targets Country Target Measure Target 2013 Target Type Armenia H CPI 4 1.5 pp P T Australia H CPI 2 - 3 Range Brazil H CPI 4.5 2 pp P T Canada H CPI 2 (mid-point of 1-3) P T Chile H CPI 3 1 pp P T Colombia H CPI 2 - 4 Range Czech Republic H CPI 2 1 pp P T Ghana H CPI 9 2 pp P T Guatemala H CPI 4 1 pp P T Hungary H CPI 3 Point Iceland H CPI 2.5 Point Indonesia H CPI 4.5 1 pp P T Israel H CPI 1 - 3 Range Mexico H CPI 3 1 pp P T New Zealand H CPI 1 - 3 Range Norway H CPI 2.5 Point Peru H CPI 2 1 pp P T Phillippines H CPI 4.0 1 pp P T Poland H CPI 2.5 1 pp P T Romania H CPI 2.5 1 pp P T Serbia H CPI 4.0 1.5 pp P T South Africa H CPI 3 - 6 Range South Korea H CPI 2.5 - 3.5 Range Sweden H CPI 2 Point Thailand Core Infl ation 0.5 - 3.0 Range Turkey H CPI 5.0 2 pp P T United Kingdom H CPI 2 Point H CPI - Headline CPI P T - Point with tolerance PP Percentage point Source: Hammond G. (2012)State of the art of infl ation targeting, CCBS, Handbook - No.29, Bank of England and Website of Central Banks Appendix Table II.4B: Non-Infl ation Targeting Countries Country Target Measure Desired level of Infl ation US PCE 2 ECB H CPI Below but close to 2 Malaysia H CPI 2 - 3 Singapore H CPI 3 - 4 Russia H CPI 5 - 6 China H CPI 3.50 PCE: Personal Consumption Expenditure Source: Website of Central Banks Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 99 Appendix Table II.5: Time Horizon for attending Price Stability Infl ation Targeting Non-infl ation Targeting Country Time horizon Country Time horizon Armenia Medium term US Long-term Australia Medium term ECB Medium-term Brazil Yearly Target Malaysia Short-term Canada Six-eight quarters current target extends to Dec.2016 Singapore Short-term Chile Around two years Russia Medium-term Colombia Medium term China Short-term Czech Republic Medium term,12-18 months Ghana 18-24 months Guatemala End of year Hungary Medium term Iceland On average Indonesia Medium term Israel Within two years Mexico Medium term New Zealand Medium term Norway Medium term Peru At all times Philippines Medium term(from 2012-14) Poland Medium term Romania Medium term target from 2013 Serbia Medium term South Africa On a continuous basis South Korea Three years Sweden Normally two years Thailand Eight quarters Turkey Multi year(Three years) United Kingdom At all times Source: Hammond G. (2012)State of the art of infl ation targeting, CCBS, Handbook - No.29, Bank of England and Website of Central Banks 100 Appendix Tables A pp en di x Ta bl e II .6 A. C om m un ic at io n an d Tr an sp ar en cy P ra ct ic es in In fl at io n Ta rg et in g C ou nt ri es Co un tr y O pe n le tt er Pa rl ia m en ta ry h ea ri ng s Pr es s N ot ic e/ Co nf er en ce M in ut es Vo te s In fl a ti on Fr eq ue nc y A rm en ia N o Ye s, a nn ua l PR Ye s, w it hi n te n da ys N o Ye s 4 Au st ra lia N o Ye s, t w ic e ye ar ly N ot ic e Ye s, a ft er t w o w ee ks n/ a Ye s 4 Br az il Ye s Ye s, s ix p er y ea r PR P C f or IR Ye s, a ft er e ig ht d ay s Ba la nc e of v ot es Ye s 4 C an ad a N o Ye s, t w ic e ye ar ly PR P C f or IR N o n/ a Ye s 4 C hi le Ye s, f ou r ti m es p er y ea r PR Ye s, a ft er t w o w ee ks ye s Ye s 4 C ol om bi a N o Ye s, t w ic e ye ar ly PR P C f or IR Ye s, a ft er t w o w ee ks M aj or it y/ un an im ou s Ye s 4 C ze ch R ep ub lic N o N o (R ep or t) PR P C f or IR Ye s, a ft er e ig ht d ay s Ye s Ye s 4 G ha na N o N o PR P C N o n/ a Ye s 4 to 6 G ua te m al a N o Ye s, t w ic e ye ar ly PR P C Ye s, a ft er f ou r w ee ks no Ye s 3 H un ga ry N o Ye s, o nc e a ye ar PC Ye s ye s Ye s 4 Ic el an d Ye s Ye s, t w ic e ye ar ly PR P C Ye s Ba la nc e of v ot es Ye s 2 pl us 2 In do ne si a N o N o PR N o n/ a Ye s 4 Is ra el N o Ye s, t w ic e ye ar ly PR Ye s, a ft er t w o w ee ks Ba la nc e of v ot es Ye s 2 M ex ic o N o Ye s, n ot r eg ul ar PR Ye s, a ft er t w o w ee ks n/ a Ye s 4 N ew Z ea la nd O th er Ye s, f ou r ti m es a y ea r PR P C f or IR N o n/ a Ye s 4 N or w ay N o Ye s PR P C N o n/ a Ye s 3 Pe ru N o Ye s, o nc e a ye ar Te le co nf er en ce N o N o Ye s 4 Ph ill ip pi ne s Ye s N o PR P C Ye s, a ft er f ou r w ee ks N o Ye s 4 Po la nd N o N o( a) PR P C Ye s, a ft er t hr ee w ee ks Ye s in IR Ye s 4 Ro m an ia N o N o PR P C f or IR N o N o Ye s 4 Se rb ia Ye s N o( b) PR P C N o N o Ye s 4 So ut h A fr ic a N o Ye s, a t l ea st th re e pe r ye ar PR P C N o n/ a Ye s 2 So ut h K or ea N o Ye s PR P C Ye s, a ft er s ix w ee ks N o Ye s 2 Sw ed en N o Ye s, t w ic e ye ar ly PR Ye s, a ft er t w o w ee ks Ye s Ye s 3 pl us 3 Th ai la nd Ye s N o PR P C Ye s, a ft er t w o w ee ks Ba la nc e of v ot es Ye s 4 Tu rk ey Ye s Ye s, t w ic e ye ar ly PR Ye s N o Ye s 4 U ni te d K in gd om Ye s Ye s, t hr ee p er y ea r PR P C f or IR Ye s, a ft er t w o w ee ks Ye s Ye s 4 IR. I nfl a ti on R ep or t. P C. P re ss C on fe re nc e PR. P re ss R el ea se. (a ) G ov er no r re po rt s to L ow er H ou se o nc e a ye ar o n M on et ar y Po lic y in p re ce di ng y ea r. (b ) G ov er no r ex pl ai ns r ep or ts t o N at io na l A ss em bl y. So ur ce. H am m on d G. ( 20 12 ) St at e of th e ar t o f i nfl a ti on ta rg et in g. C C BS. H an db oo k - N o. 29. B an k of E ng la nd a nd W eb si te o f C en tr al B an ks Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 101 Appendix Table II.6B: Communication and Transparency Practices in Non-infl ation Targeting Countries Country Press Notice/ Conference Minutes of Monetary Policy Meeting Infl ation Projection Other Publications US PR PC Yes, within twenty days 2 years ahead ECB PR PC No N. A. Malaysia PR No One Year Outlook and Policy (annual) Singapore PR No One year Macroeconomic Review (twice a year) Russia PR No N. A. Guidelines for Single State Monetary Policy, Monetary Policy Report China PR No One year Quarterly Monetary Policy Report PR: Press Release PC: Press Conference. Source: Website of Central Banks. 102 Appendix Tables C ou nt ry / C en tr al B an k D ec is io n m ak in g by Po li cy ob je ct iv e M on et ar y po li cy t ar ge t K ey p ol ic y ra te St an di ng Fa ci li ty Re se rv e re qu ir em en ts M ar ke t op er at io ns U ni te d St at es (F ed er al Re se rv e Sy st em ) Fe de ra l O pe n M ar ke t C om m it te e Pr om ot e pr ic e st ab ili ty a nd m ax im um su st ai na bl e em pl oy m en t M ax im um em pl oy m en t an d 2 pe r ce nt in fl a ti on U nc ol la te ra lis ed in te rb an k ra te Pr im ar y C re di t Fa ci lit y. N o D ep os it fa ci lit y Ye s Ye s U ni te d K in gd om (B an k of En gl an d) M on et ar y Po lic y C om m it te e To m ai nt ai n pr ic e st ab ili ty an d to s up po rt th e ob je ct iv es fo r gr ow th a nd em pl oy m en t A n in fl a ti on ta rg et in g fr am ew or k Th e of fi c ia l B an k R at e pa id o n co m m er ci al b an k re se rv es Ye s N o Ye s Br az il (C en tr al B an k of B ra zi l) M on et ar y Po lic y C om m it te e A ch ie ve m en t of in fl a ti on t ar ge ts se t by t he G ov er nm en t A n in fl a ti on ta rg et in g fr am ew or k In te re st r at e on o ve rn ig ht in te rb an k lo an s Ye s Ye s Ye s C an ad a (B an k of C an ad a) G ov er ni ng C ou nc il C on tr ib ut in g to s us ta in ed ec on om ic gr ow th. r is in g le ve ls o f em pl oy m en t an d im pr ov ed liv in g st an da rd s A n in fl a ti on ta rg et in g fr am ew or k In te re st r at e on co lla te ra liz ed m ar ke t-b as ed ov er ni gh t tr an sa ct io ns Ye s N o Ye s A pp en di x Ta bl e II I.1. M on et ar y Po li cy F ra m ew or k - I nt er na ti on al E xp er ie nc e : I n it s re ce nt p ol ic y an no un ce m en ts. th e Fe d ha s in di ca te d th at t he ir a ss es sm en t su gg es ts t ha t it w ill b e ap pr op ri at e to m ai nt ai n th e cu rr en t ta rg et r an ge f or t he F ed er al F un ds r at e w el l pa st t he t im e th at t he u ne m pl oy m en t ra te d ec lin es b el ow 6 .5 p er c en t, e sp ec ia lly i f pr oj ec te d in fl a ti on c on ti nu es t o ru n be lo w t he c om m it te e s 2 pe r ce nt lo ng er - r un g oa l. In 2 00 8, t he F ed s ta rt ed p ay in g in te re st o n re qu ir ed a nd e xc es s re se rv es. t o av oi d do w nw ar d pr es su re s on t he F ed F un ds r at e. (C on td. ) Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 103 C ou nt ry / C en tr al B an k D ec is io n m ak in g by Po li cy ob je ct iv e M on et ar y po li cy t ar ge t K ey p ol ic y ra te St an di ng Fa ci li ty Re se rv e re qu ir em en ts M ar ke t op er at io ns Eu ro a re a (E ur op ea n Sy st em o f C en tr al B an ks ) G ov er ni ng C ou nc il To m ai nt ai n pr ic e st ab ili ty In fl a ti on b el ow bu t cl os e to 2 pe r ce nt o ve r m ed iu m - te rm M in im um b id ra te in m ai n re fi n an ci ng op er at io ns Ye s Ye s Ye s Au st ra lia (R es er ve B an k of A us tr al ia ) Re se rv e Ba nk Bo ar d A ch ie ve m en t of in fl a ti on t ar ge t A n in fl a ti on ta rg et in g fr am ew or k Ta rg et c as h ra te Ye s N o Ye s Ja pa n (B an k of Ja pa n) Th e Po lic y Bo ar d M ul ti pl e ob je ct iv es 2 pe r ce nt in fl a ti on U nc ol la te ra liz ed ov er ni gh t ca ll ra te Ye s Ye s Ye s Si ng ap or e (M on et ar y Au th or it y of Si ng ap or e) M on et ar y an d In ve st m en t Po lic y Pr ic e st ab ili ty fo r su st ai na bl e ec on om ic gr ow th Pr ic e st ab ili ty fo r su st ai na bl e ec on om ic gr ow th Ex ch an ge r at e Ye s Ye s Ex ch an ge in te rv en ti on M ex ic o (B an k of M ex ic o) Bo ar d of G ov er no rs A ch ie ve m en t of pr ic e st ab ili ty A n in fl a ti on ta rg et in g fr am ew or k Ta rg et f or t he in te rb an k ov er ni gh t fu nd in g ra te Ye s N o Ye s Sw it ze rl an d (S w is s N at io na l Ba nk ) G ov er ni ng Bo ar d Pr ic e st ab ili ty Pr ic e st ab ili ty C H F 3- m on th Li bo r Ye s Ye s Ye s Sw ed en (R ik sb an k) Ex ec ut iv e Bo ar d M ai nt ai n pr ic e st ab ili ty A n in fl a ti on ta rg et in g fr am ew or k Re po r at e Ye s N o Ye s K or ea (B an k of K or ea ) M on et ar y Po lic y C om m it te e Pr ic e st ab ili ty A n in fl a ti on ta rg et in g fr am ew or k Th e Ba nk o f K or ea B as e R at e Ye s Ye s Ye s A pp en di x Ta bl e II I.1. M on et ar y Po li cy F ra m ew or k - I nt er na ti on al E xp er ie nc e (C on cl d. ) 104 Appendix Tables Co un tr y Ba nk R es er ve St an di ng F ac ili ty M ai n Li qu id it y O pe ra ti on O th er d is cr et io na ry Co un te r p ar ty Re q. Av g. Lo an D ep os it Te no r In st ru m en t( s) Te no r Fr eq. In st ru m en t Te no r Co lla te ra l Le nd in g O pe ra ti on s Au st ra lia N Y Y O ve rn ig ht Re po / Re v. re po 1 da y to 12 m on th s da ily O ut rig ht / Fx - S w ap / te rm d ep os it 1 da y to 3 m on th di sc re tio n W id e Br az il Y Y Y Y Tw o D ay s Re po / Re v. re po 1- 30 d ay s da ily O ut rig ht o pe ra tio n no n - st an da rd iz ed. no n - re gu la r no d is cr et io n Ca na da N Y Y O ve rn ig ht O M O / In tr ad ay th ro ug h sp ec ia l p ur ch as e an d Re sa le da ily co lla te ra l i nc lu de s U S tr ea su ry b ill s, no te s an d bo nd s, lis t o f t re as ur e w er e ex pa nd ed d ur in g th e cr is is O M O fo r P D s, S F fo r P ay m en t a nd se tt le m en t s ys te m pa rt ic ip an ts Eu ro A re a Y Y Y Y O ve rn ig ht Co lla te ra liz ed cr ed it va ria bl e w ee kl y/ m on th ly O M O a nd In tr ad ay cr ed it th e Go ve rn in g co un ci l h as th e di sc re tio n to e xp an d W id e in te rm s of b ot h ty pe a nd pa rt ic ip an ts H on g Ko ng SA R N Y O ve rn ig ht Tw o w ay c on ve rt ib ili ty u nd er ta ki ng al l e xc ha ng e fu nd bi ll an d no te s, ex te nd ed to u se U S Tr ea su ri es u nd er di sc ou nt w in do w Ja pa n Y Y Y Y Fi xe d Te rm Re po (s ho rt ru n) ov er ni gh t to 1 y ea r 2- 3 tim es a da y O M O Ja pa n Go ve rn m en t Bo nd s / C Ps L aw ge ne ra lly li m its ex pa nd in g co lla te ra l W id e bu t v ar ie s w ith fa ci lit ie s Ko re a Y Y Y Y O ve rn ig ht Re po /R ev. re po (i ss ue r / r ed em pt io n of m on ey st ab ili sa tio n bo nd s) 7 da ys w ee kl y Ad di tio na l re po s 1- 3 da ys Ba nk o f K or ea a ct gi ve s th e ba nk di sc re tio n to e xt en d lo an a ga in st th e co lla te ra l o f a ny as se t. N ar ro w fo r O M O. w id e fo r S F A pp en di x Ta bl e II I.2. S ta nd in g Fa ci li ti es. M ai n Li qu id it y O pe ra ti on s an d O th er D is cr et io na ry O pe ra ti on s of S om e M aj or C en tr al B an ks . N ot a pp lic ab le. (C on td. ) Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 105 Co un tr y Ba nk R es er ve St an di ng F ac ili ty M ai n Li qu id it y O pe ra ti on O th er d is cr et io na ry Co un te r p ar ty Re q. Av g. Lo an D ep os it Te no r In st ru m en t( s) Te no r Fr eq. In st ru m en t Te no r Co lla te ra l Le nd in g O pe ra ti on s M ex ic o N Y Y O ve rn ig ht O pe n m ar ke t op er at io n 1- 25 d ay s da ily Lo ng te rm s te ril is at io n of e xc es s liq ui di ty / sp or ad ic u se o f co m pu ls or y de po si t ce nt ra l b an k ha s th e di sc re tio n to ex pa nd o th er ty pe o f co lla te ra ls O M O fo r a ll lo ca l ba nk s, S F fo r p ri va te se ct or b an ks o nl y Si ng ap or e Y Y Y Y O ve rn ig ht Ex ch an ge ra te in te rv en tio n FS - s po t di sc re - tio na ry Re po / Fx - s w ap di re ct le nd in g / b or ro w in g U p to 1 ye ar M AS h as th e di sc re tio n to e xp an d co lla te ra l PD o nl y fo r O M O. al l R TG S pa rt ic ip an ts fo r S F Sw ed en N Y Y O ve rn ig ht Re po / Ri ks ba nk ce rt ifi ca te 1 w ee k lo an / de po si t O ve r - ni gh t Ac t a llo w s ex pa ns io n of c ol la te ra l W id e Sw itz er la nd Y Y Y O ve rn ig ht O pe n m ar ke t op er at io n /r ep o /S N B Bi lls M os tly on e w ee k da ily In je ct io n / ab so rp tio n th ro ug h au ct io ns M os tly ov er - ni gh t SN B ha s di sc re tio n on c ol la te ra l W id e in te rm s of ty pe U K Vo lu nt ar y Y Y O ve rn ig ht Sh or t t er m (fi x ed ra te ) l on g te rm (v ar ia bl e ra te re po op er at io n) w ee kl y / m on th ly St er lin g Fi na nc in g th ro ug h O M O br oa d ba se d se cu ri ty fo r d is co un t w in do w Va ri es w ith fa ci lit y - ba nk s fo r l iq ui di ty U SA Y Y Pr im ar y Cr ed it Ge ne ra lly O ve rn ig ht re po up to 6 5 da ys da ily / w ee kl y O M O va ria bl e U nd er e xc ep tio na l si tu at io n PD s on ly O M O s w id e fo r S F So ur ce. BI S M ar ke ts C om m itt ee s ev er al p ub lic at io ns. w eb - s ite s of c en tr al b an ks. N ar ro w re st ric te d fo r se le ct f ew i ns tit ut io ns ( w id e ot he rw is e) Y ye s, N N o, PD pr im ar y de al er s, S F St an di ng li qu id ity fa ci lit y. A pp en di x Ta bl e II I.2. C ro ss C ou nt ry S ta nd in g Fa ci li ti es. M ai n Li qu id it y O pe ra ti on s an d O th er D is cr et io na ry O pe ra ti on s (C on cl d. ) 106 Appendix Tables D ep os it R at es Le nd in g Ra te Sa vi ng D ep os it Te rm D ep os it Ef fe ct iv e fr om Re st ri ct io ns a nd Re gu la ti on s Pr es cr ib ed M on th Ye ar R es tr ic ti o n s an d R eg u la ti o n s Pr es cr ib ed M on th Ye ar R es tr ic ti o n s an d R eg u la ti o n s Pr es cr ib ed Ju ly 1. 19 77 3 pe r ce nt (c he qu eb le de po si ts ) a nd 5 p er ce nt (n on - c he qu ea bl e) A pr. 1 98 5 Ba nk s w er e al lo w ed t o se t in te re st ra te s fo r m at ur it ie s be tw ee n 15 d ay s an d up to 1 y ea r, s ub je ct to a c ei lin g of 8 p er c en t. M ar ch 19 81 A b ro ad f ra m ew or k of in te re st r at es w as p ro vi de d w it h fi x ed r at es o n ce rt ai n ty pe s of a dv an ce s an d ce ili ng ra te o n ot he r ty pe s of a dv an ce s. M ar ch 2. 19 78 4. 5 pe r ce nt. u ni fo rm ly M ay 1 98 5 Fr ee d o m t o s et i n te re st r at es ac co rd e d in A p ri l 1 9 6 5 w as w it hd ra w n. O ct ob er 19 88 Fi xe d ra te s ti pu la ti on s co n ve rt ed in to fl oo r r at es w it h op ti on to b an ks to r ai se t he r at es. A pr il 24 ,1 99 2 6. 0 pe r ce nt O ct. 1 98 9 D om es ti c sh or t te rm d ep os it s of m at ur it y 46 d ay s to 9 0 da ys a nd 9 0 da ys t o on e ye ar m er ge d to ge th er w it h un if or m i nt er es t ra te p ay ab le. ef fe ct iv e O ct ob er 1 1, 1 98 9. Se pt em be r 19 90 D is co n ti n ua ti on o f se ct or - s pe ci fi c an d pr og ra m m e - sp ec ifi c in te re st ra te st ip ul at io ns. b ar ri ng a fe w a re as li ke ag ri cu lt u re. sm al l in d u st ri es. di ff er en ti al r at e of i n te re st ( D RI ) sc he m e an d ex po rt c re di t. L in ki ng in te re st r at e to t he s iz e of t he l oa n (o ve r 2 la kh ) w as in tr od uc ed. Ju ly 1 ,1 99 3 5. 0 pe r ce nt A pr. 1 99 2 Re pl ac em en t o f m at ur it y - w is e ce ili ng ra te s by a s in gl e ce ili ng ra te o f 1 3 pe r ce nt o n al l d ep os it s ab ov e 46 d ay s. A pr il 19 92 Th e in te re st r at es o f SC Bs ( ex ce pt D RI a dv an ce s a nd e xp or t c re di t) w er e ra ti on al iz ed b y br in gi ng th e si x sl ab s of a dv an ce s to f ou r sl ab s ac co rd in g to s iz e of c re di t. N ov em be r 1, 1 99 4 4. 5 pe r ce nt N ov. 1 99 4 C ei lin g ra te w as b ro ug ht d ow n to 1 0 pe r ce nt. A pr il 19 93 L e n d in g ra te s w e re fu rt h e r ra ti on al iz ed a s th e nu m be r of s la bs w as b ro u gh t d o w n f ro m f o u r ca te go ri es t o th re e ca te go ri es b y m er gi ng t he fi rs t tw o sl ab s. A pp en di x Ta bl e II I.3. D er eg ul at io n of In te re st R at es in In di a (C on td. ) Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 107 D ep os it R at es Le nd in g Ra te Sa vi ng D ep os it Te rm D ep os it Ef fe ct iv e fr om Re st ri ct io ns a nd Re gu la ti on s Pr es cr ib ed M on th Ye ar R es tr ic ti o n s an d R eg u la ti o n s Pr es cr ib ed M on th Ye ar R es tr ic ti o n s an d R eg u la ti o n s Pr es cr ib ed A pr il 1, 20 00 4. 0 pe r ce nt A pr. 1 99 5 C ei lin g ra te r ai se d to 1 2 pe r ce nt. O ct ob er 19 94 Le nd in g ra te s fo r c re di t l im it o f o ve r 2 l ak h w er e de re gu la te d. B an ks w er e re qu ir ed to d ec la re th ei r P ri m e Le nd in g R at es (P LR s). M ar ch 1. 20 03 3 .5 p er c en t O ct. 1 99 5 In te re st r at es o n d ep os it s w it h m at u ri ty o f ov er t w o ye ar s w er e fr ee d. O ct ob er 19 95 In te re st r at e on a dv an ce s ag ai n st te rm d ep os it s of 2 la kh a nd a bo ve fo r b ot h do m es ti c an d N RE d ep os it s w er e de re gu la te d. M ay 3. 20 11 4. 0 pe r ce nt Ju l. 19 96 Fr ee do m to s et ra te s fo r t er m d ep os it ab ov e on e ye ar m at ur it y. M in im um pe ri od o f t er m d ep os it b ro ug ht d ow n fr om 4 6 da ys t o 30 d ay s. F or t h e m at ur it y bu ck et o f 3 0 da ys to 1 y ea r, ba nk s co ul d fi x in te re st ra te s su bj ec t to a c ei lin g. Fe br ua ry 19 97 Ba nk s al lo w ed to p re sc ri be P LR s an d sp re ad s se pa ra te ly fo r l oa n an d ca sh cr ed it c om po ne nt s of lo an s. O ct 2 5, 20 11 D er eg ul at io n su bj ec t to co nd it io ns. A pr. 1 99 7 C ei li n g in te re st r at e on d om es ti c te rm d ep os it s of m at ur it y of 3 0 da ys an d up to 1 y ea r w as li nk ed to B an k R at e O ct ob er 19 97 Fo r te rm lo an s of 3 y ea rs a nd a bo ve. se pa ra te P ri m e Te rm L en di ng R at es (P T L R s) w er e re q u ir ed t o b e an no un ce d by b an ks. O ct .1 99 7 Te rm d ep o si t ra te s w er e fu ll y de re gu la te d. A pr il 19 98 PL R co nv er te d as a c ei lin g ra te o n lo an s up t o 2 la kh. A pp en di x Ta bl e II I.3. D er eg ul at io n of In te re st R at es in In di a (C on td .) 108 Appendix Tables D ep os it R at es Le nd in g Ra te Sa vi ng D ep os it Te rm D ep os it Ef fe ct iv e fr om Re st ri ct io ns a nd Re gu la ti on s Pr es cr ib ed M on th Ye ar R es tr ic ti o n s an d R eg u la ti o n s Pr es cr ib ed M on th Ye ar R es tr ic ti o n s an d R eg u la ti o n s Pr es cr ib ed A pr .1 99 8 Fr ee do m to o ff er d if fe re nt ia l i nt er es t ra te fo r b ul k de po si ts o f 15 la kh a nd ab ov e. F re ed om t o se t ow n p en al in te re st r at es o n p re m at u re w it h d ra w al o f d o m es ti c te rm d ep o si ts. M in im u m p er io d o f m at ur it y of t er m d ep os it s re du ce d fr om 3 0 da ys t o 15 d ay s. A pr il 19 99 Ba n ks w er e pr ov id ed f re ed om t o op er at e te no r lin ke d PL R. A pr. 2 00 1 M in im um m at ur it y pe ri od o f 1 5 da ys re du ce d to 7 d ay s fo r w h ol es al e de po si ts o f 1 5 la kh a nd a bo ve. O ct ob er 19 99 Fl ex ib ili ty t o ch ar ge i n te re st r at es w it h ou t re fe re n ce t o th e PL R o n ce rt ai n ca te go ri es o f lo an s/ cr ed it. N ov. 2 00 4 M in im um m at ur it y pe ri od o f 1 5 da ys re du ce d to 7 d ay s fo r al l d ep os it s. A pr il 20 00 B an ks a ll ow ed t o ch ar ge f ix ed / fl oa ti n g ra te o n t h ei r le n di n g fo r cr ed it li m it o f ov er 2 la kh. Ja n. 20 13 B an ks w er e p er m it te d t o of fe r di ff er en ti al d ep os it r at es f or b ul k de po si ts o f 1 c ro re a nd a bo ve. A pr il 20 01 C om m er ci al b an ks a llo w ed t o le nd at s ub - P LR r at e fo r lo an s ab ov e 2 la kh. A pr il 20 03 Te no r l in ke d PL R sy st em re pl ac ed b y Be n ch m ar k Pr im e Le n d in g R at e (B PL R). Ju ly 2 01 0 In tr od uc ti on o f Ba se R at e Sy st em. w h ic h s er ve s as t h e fl o or r at e fo r al m os t al l t yp es o f ad va nc es. : T he r eg ul at io n th at n o in te re st m ay b e pa id o n cu rr en t de po si ts c on ti nu es t ill d at e. A pp en di x Ta bl e II I.3. D er eg ul at io n of In te re st R at es in In di a (C on cl d. ) Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 109 Appendix Table III.4: Money Demand Estimates M3 defl ated by GDP defl ator Rolling Reg Output: Log(real money). log(rgdp), call rate (i) with 15-year window start end lrgdp t-stat Call Rate t-stat Constant t-stat 1 1991 2005 1.57 18.5 0.00 0.3 -10.75 -12.3 2 1992 2006 1.58 21.7 0.00 0.3 -10.85 -14.4 3 1993 2007 1.57 28.1 0.00 -0.4 -10.79 -18.5 4 1994 2008 1.58 35.4 -0.01 -1.2 -10.80 -23.1 5 1995 2009 1.59 35.7 0.00 -0.9 -10.94 -23.1 6 1996 2010 1.60 35.1 0.00 -0.6 -11.05 -22.7 7 1997 2011 1.52 29.3 -0.01 -1.2 -10.23 -17.8 8 1998 2012 1.44 34.6 -0.02 -2.6 -9.34 -20.5 9 1999 2013 1.40 37.2 -0.02 -3.1 -8.89 -21.9 M3 defl ated by WPI Index Rolling Reg Output: Log(real money). log(rgdp), call rate (i) with 15-year window start end lrgdp t-stat Call Rate t-stat Constant t-stat 1 1991 2005 1.59 23.1 0.00 0.1 -10.94 -15.4 2 1992 2006 1.58 26.6 0.00 0.0 -10.83 -17.6 3 1993 2007 1.56 36.1 0.00 -1.2 -10.61 -23.5 4 1994 2008 1.56 44.9 -0.01 -2.0 -10.59 -29.0 5 1995 2009 1.56 44.0 -0.01 -1.8 -10.61 -28.1 6 1996 2010 1.55 40.4 -0.01 -1.6 -10.55 -25.6 7 1997 2011 1.51 34.4 -0.01 -1.0 -10.05 -20.7 8 1998 2012 1.42 45.3 -0.02 -2.9 -9.13 -26.6 9 1999 2013 1.39 49.7 -0.02 -3.5 -8.73 -29.1 M3 defl ated by GDP defl ator Rolling Reg Output: Log(real money). log(rgdp), WALR with 15-year window start end lrgdp t-stat WALR t-stat Constant t-stat 1 1991 2005 1.54 31.5 0.00 -1.0 -10.44 -21.6 2 1992 2006 1.15 16.1 -0.07 -6.1 -5.60 -6.5 3 1993 2007 1.18 14.6 -0.06 -5.3 -5.89 -6.0 4 1994 2008 1.30 16.8 -0.05 -4.2 -7.28 -7.7 5 1995 2009 1.32 17.1 -0.05 -4.0 -7.54 -8.0 6 1996 2010 1.33 13.5 -0.04 -3.0 -7.74 -6.4 7 1997 2011 1.23 14.9 -0.06 -4.4 -6.45 -6.3 8 1998 2012 1.24 22.7 -0.06 -5.2 -6.63 -9.5 9 1999 2013 1.22 26.4 -0.06 -5.5 -6.34 -10.5 WALR: Weighted Avereage Lending Rate. 110 Appendix Tables Appendix Table III.5: Access to Liquidity Under Refi nance Facilities 15-Apr-1997 A general refi nance facility was introduced effective from April 26, 1997 under which all SCBs (expect RRBs) were provided General Refi nance equivalent to 1 per cent of each banks forthightly average outstanding aggregate deposits in 1996-97 in two blocks of 4 weeks each at Bank rate for the fi rst block of 4 weeks and Bank rate plus one percentage point for second block of 4 weeks. 15-Apr-1997 From April 26, 1997 the base level ECR limit at 20 per cent of export credit as on Feb. 16, 1996 was withdrawn and SCBs were provided ECR only to the extent of 100 per cent of the increase in outstanding export credit eligible for refi nance over the level of such credit as on Feb. 16, 1996. Interest rate was retained at 11 per cent (i. e. the Bank Rate). 16-Jan-1998 Effective from Jan 17, 1998 the ECR limit was lowered to 50 per cent of the increase in outstanding export credit eligible for refi nance over the level of such credit as on Feb. 16, 1996, in order to reduce the access to liquidity in the context of measures announced relating to foreign exchange market. 16-Jan-1998 Access to General Refi nance Facility was reduced to equivalent to 0.25 per cent of forthightly average outstanding aggregate deposits in 1996-97. 15-Apr-1998 General Refi nance Facility was closed (effective from April 20, 1998). 29-Apr-1998 Export Credit Refi nance Limit was raised to 100 per cent (effective from May 9, 1998). 19-Apr-2001 With effect from May 5, 2001 SCBs were provided ECR to the extent of 15 per cent of the outstanding export credit eligible for refi nance as at the second preceding fortnight. 3-Nov-2008 A special refi nance facility was introduced under which all SCBs (excluding RRBs) were provided refi nance (which could be fl exibly drawn and repaid) from the Reserve Bank equivalent to up to 1.0 per cent of each banks NDTL as on October 24, 2008 at the LAF repo rate up to a maximum period of 90 days. 18-May-2004 ECR made available at the Reverse Repo Rate. 15-Nov-2008 Eligible limit for ECR facility increased from 15 per cent to 50 per cent of outstanding export credit eligible for refi nance. 6-Dec-2008 Refi nance facility of 7,000 crore was provided to SIDBI at the Repo Rate. This facility was available up to March 31, 2010 11-Dec-2008 Refi nance facility of 4,000 crore was provided to the National Housing Bank at the Repo Rate. This facility was available up to March 31, 2010 11-Dec-2008 Refi nance facility of 5,000 crore was provided to the EXIM Bank at the Repo Rate. This facility was available up to March 31, 2013. 27-Oct-2009 The special refi nance facility introduced on November 03, 2008 was closed. 27-Oct-2009 Eligible limit of ECR facility reduced from 50 per cent of the outstanding rupee export credit eligible for refi nance to 15 per cent. 18-Jun-2012 Export Credit Refi nance limit increased to 50 per cent from 15 per cent of eligible outstanding export credit. 14-Jan-2013 INR-USD swap facility with the Reserve Bank was provided to SCBs (except RRBs) to support incremental Pre-shipment export credit in foreign currency, with the option to access rupee refi nance to the extent of swap with the RBI under Special Export Credit Refi nance Facility (SECRF). The scheme was closed on June 28, 2013. 18-Nov-2013 Refi nance facility of 5,000 crore was provided to SIDBI. This refi nance facility is be available up to November 13, 2014. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 111 Appendix Table III.6: CPI-Combined (back-casted series) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2001 55.5 55.4 55.7 56.1 56.5 57.1 57.8 58.2 58.0 58.6 59.0 58.8 2002 58.6 58.5 58.9 59.2 59.6 60.2 60.8 61.1 61.2 61.5 61.7 61.3 2003 61.2 61.4 61.8 62.7 62.8 63.0 63.5 63.1 63.2 63.7 63.8 63.7 2004 63.8 63.8 63.9 64.1 64.6 65.1 65.6 66.2 66.3 66.8 66.6 66.1 2005 66.6 66.6 66.6 67.1 66.7 66.8 67.9 68.1 68.2 68.8 69.5 69.2 2006 69.3 69.3 69.3 70.0 70.9 71.9 72.3 72.8 73.3 74.2 74.2 73.9 2007 73.9 74.1 74.1 74.8 75.2 75.8 76.9 77.2 77.3 77.9 78.0 78.0 2008 78.1 78.6 79.7 80.7 80.8 81.9 83.3 84.3 85.1 86.7 86.7 85.5 2009 85.9 85.8 86.1 87.0 87.9 88.9 92.0 92.9 93.6 94.6 96.5 96.7 2010 97.4 96.5 96.3 97.0 97.8 99.0 101.3 101.4 102.3 102.9 103.5 104.7 2011 105.9 105.3 105.6 106.2 107.1 108.8 110.5 111.7 113.0 113.8 114.1 113.6 2012 114.0 114.6 115.5 117.1 118.2 119.6 121.4 122.9 124.0 124.9 125.4 125.6 2013 126.3 127.1 127.5 128.1 129.2 131.4 133.1 134.6 136.2 137.5 139.5 138.0 The new series of Consumer Price Index-Combined (CPI-C) (Base: 2010100) is available on a monthly basis from January-2011. For the purpose of empirical analysis in this Report, back-casted data had to be generated, and the data presented here should not be seen as an offi cial price index. The back-casted series of CPI-C was generated by using the price indices of Consumer Price Index-Industrial Workers (CPI-IW) (Base: 2001100) and applying the corresponding weighting diagram of CPI-C at sub-group level, with some minor adjustments. 112 Appendix Tables C ou nt ry K ey P ol ic y Ra te H ik es K ey P ol ic y Ra te C ut s Li qu id it y M ea su re s FX in te rv en ti on FX s w ap s C ap it al ac co un t m an ag em en t M ac ro - pr ud en ti al m ea su re s In do ne si a R at es w er e hi ke d in s ev er al st ag es b y 17 5 bp s. A ss ur an ce t o pr ov id e do m es ti c liq ui di ty. A ss ur an ce to p ro vi de do m es ti c liq ui di ty. Ye s A ls o a sp ec ia l sw ap li ne w it h Ba nk o f K or ea. A llo w ed m or e m in er al ex po rt s ea si ng o f ho ld in g pe ri od re st ri ct io ns to a tt ra ct in fl o w s. Ba nk In do ne si a D ep os it C er ti fi c at es ad de d as a co m po ne nt of S ec on da ry St at ut or y Re se rv es L TV on p ro pe rt y lo an s ra is ed. Th ai la nd C ut o ve rn ig ht re po r at e by 2 5 bp s to 2 .5 o n M ay 2 9, 2 01 3. So ut h K or ea Ye s Sw ap li ne w it h Ba nk In do ne si a. Tu rk ey C ut r eq ui re d re se rv e ra ti os o n fo re x de po si ts t o bo os t m ar ke t liq ui di ty. Tr ie d us in g fo re x in te rv en ti on fo r m on et ar y po lic y go al s, bu t th is c ou ld no t co nt ai n in fl a ti on. D ou bl ed th e am ou nt of r es er ve s th at b an ks ar e al lo w ed to k ee p in f or ei gn cu rr en cy. Fo re x re se rv e ra ti o re qu ir em en t w as in cr ea se d. A pp en di x Ta bl e V .1. M ea su re s A im ed a t M an ag in g th e Im pa ct o f Ta pe r Ta lk (C on td. ) Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 113 C ou nt ry K ey P ol ic y Ra te H ik es K ey P ol ic y Ra te C ut s Li qu id it y M ea su re s FX in te rv en ti on FX s w ap s C ap it al ac co un t m an ag em en t M ac ro - pr ud en ti al m ea su re s Ru ss ia U nd er to ok li qu id it y m an ag em en t re fo rm s. In tr od uc ed 1 - w ee k te rm r ep os a s th e m ai n in st ru m en t. 1 - d ay r ep o to b e di sc on ti nu ed fr om F eb .1. 2 01 4. W ill st ar t us in g 1- 6 da y re po a s fi n e - tu ni ng op er at io ns. I nt ro du ce d st an di ng f ac ili ty. Br az il H ik ed S el ic r at e 15 0 bp s fr om 8. 0 t o 9. 5 du ri ng M ay - O ct. 20 13. E ar lie r it h ad r ai se d Se lic r at e 75 b ps du ri ng Ja n - A pr il 20 13. O n Au g. 24 U S 54 b n In te rv en ti on Pl an an no un ce d af te r 15 de pr ec ia ti on of r ea l i n th re e m on th s. In cl ud ed w ee kl y au ct io n of U S 1 bn d ol la r lo an s. U S 0. 5 bn o f fo re x sw ap s fo ur d ay s a w ee k. R ea l ap pr ec ia te d 7. 7 d ur in g Se pt - O ct. 20 13 a id ed b y in te rv en ti on pl an b ut ra is ed t he co st o f it s co nt in ua ti on. H ow ev er. o n N ov. 8. t he ce nt ra l b an k an no un ce d ro llo ve r of sw ap s th us in cr ea si ng it s in te rv en ti on. Re la xe d ca pi ta l in fl o w s. Sc ra pp ed th e 6 IO F on f or ei gn po rt fo lio in fl o w s in to fi x ed in co m e in ve st m en ts. A pp en di x Ta bl e V .1. M ea su re s A im ed a t M an ag in g th e Im pa ct o f Ta pe r Ta lk (C on cl d. ) 114 Appendix Tables A si an c ri si s of 1 99 7- 98 R at e M ea su re s In cr ea se in B an k R at e (t o 11 p er c en t) a nd r ev er se r ep o ra te (t o 9 pe r ce nt ) b y tw o pe rc en ta ge p oi nt s ea ch o n Ja nu ar y 16. 1 99 8. In cr ea se in in te re st r at e su rc ha rg e on b an k cr ed it f or im po rt s to 3 0 pe r ce nt o n Ja nu ar y 16. 1 99 8. H ik e in t he in te re st r at e on p os t - sh ip m en t ru pe e ex po rt c re di t be yo nd 9 0 da ys a nd u p to 6 m on th s fr om 1 3 pe r ce nt t o 15 p er c en t on N ov em be r 26. 1 99 7 (a b ri ef p er io d of s ta bi lit y in e nd - D ec em be r le d to w it hd ra w al o f th e hi ke f ro m Ja nu ar y 1, 1 99 8). O n D ec em be r 17. 1 99 7 it w as s ti pu la te d th at th e m in im um in te re st r at e of 2 0 pe r ce nt p er a nn um to b e ch ar ge d on o ve rd ue e xp or t bi lls. A n in te re st r at e su rc ha rg e of 1 5 pe r ce nt o n im po rt c re di t w as a ls o an no un ce d. Q ua nt it y M ea su re s C RR w as r ai se d tw ic e in D ec em be r 19 97 (b y 50 b ps t o 10 p er c en t an d th e in cr em en ta l 1 0 pe r ce nt C RR o n N RE a nd N RN R de po si t sc he m es w as w it hd ra w n) a nd J an ua ry 1 99 8 (b y 50 b ps t o 10 .5 p er c en t). T hi s w as in te nd ed t o ab so rb e xc es s liq ui di ty a nd r em ov e th e ar bi tr ag e on a cc ou nt o f lo w r at es in t he c al l m on ey m ar ke t an d th e po te nt ia l g ai ns in t he f or ei gn e xc ha ng e m ar ke t. Re du ct io n in a cc es s to r efi n an ce f ac ili ti es (g en er al r efi n an ce li m it r ed uc ed f ro m 1 .0 p er c en t to 0 .2 5 pe r ce nt o f fo rt ni gh tl y av er ag e ou ts ta nd in g ag gr eg at e de po si ts i n 19 96 -9 7 an d ex po rt r efi n an ce li m it r ed uc ed f ro m 1 00 p er c en t to 5 0 pe r ce nt o f th e in cr ea se i n ou ts ta nd in g ex po rt c re di t ov er F eb ru ar y 16. 1 99 6). G lo ba l fi n an ci al c ri si s of 2 00 8- 09 R at e M ea su re s C ut in t he r ep o ra te u nd er t he L A F by a c um ul at iv e 42 5 bp s fr om 9 .0 p er c en t to 4 .7 5 pe r ce nt. C ut in t he r ev er se r ep o ra te b y a cu m ul at iv e 27 5 bp s fr om 6 .0 p er c en t to 3 .2 5 pe r ce nt. Th e ce ili ng r at e on e xp or t cr ed it in f or ei gn c ur re nc y in cr ea se d to L IB O R pl us 3 50 b ps. C um ul at iv e in cr ea se in th e in te re st r at e ce ili ng s on F C N R( B) a nd N R( E) RA te rm d ep os it s by 1 75 b ps e ac h si nc e Se pt em be r 16. 2 00 8. Q ua nt it y M ea su re s C ut in t he C RR b y a cu m ul at iv e 40 0 bp s of N D TL f ro m 9 .0 p er c en t to 5 .0 p er c en t. In tr od uc ti on o f a s pe ci al r efi n an ce fa ci lit y up to M ar ch 3 1, 2 01 0 un de r w hi ch a ll SC Bs (e xc lu di ng R RB s) p ro vi de d re fi n an ce fr om th e Re se rv e Ba nk e qu iv al en t to 1 .0 p er c en t of e ac h ba nk s N D TL a s on O ct ob er 2 4, 2 00 8. Te rm r ep o fa ci lit y un de r th e LA F to e na bl e ba nk s to e as e liq ui di ty s tr es s fa ce d by m ut ua l fu nd s, N BF C s an d ho us in g fi n an ce co m pa ni es (H FC s) w it h as so ci at ed S LR e xe m pt io n of 1 .5 p er c en t of N D TL. T hi s fa ci lit y is a va ila bl e up t o M ar ch 3 1, 2 01 0. Re du ct io n in s ta tu to ry l iq ui di ty r at io ( SL R) f ro m 2 5 pe r ce nt t o 24 p er c en t of N D TL w it h ef fe ct f ro m t he f or tn ig ht b eg in ni ng N ov em be r 8, 2 00 8. In tr od uc ti on o f a m ec ha ni sm t o bu yb ac k da te d se cu ri ti es is su ed u nd er t he M SS. Ex te ns io n of th e pe ri od o f e nt it le m en t b y 90 d ay s of th e fi r st s la b of p re - s hi pm en t a nd p os t - sh ip m en t r up ee e xp or t c re di t w it h ef fe ct fr om N ov em be r 15. 2 00 8 an d N ov em be r 28. 2 00 8, r es pe ct iv el y. In cr ea se i n th e el ig ib le l im it o f th e EC R fa ci lit y fo r sc he du le d ba nk s (e xc lu di ng R RB s) f ro m 1 5 pe r ce nt t o 50 p er c en t of t he ou ts ta nd in g ex po rt c re di t el ig ib le f or r efi n an ce. A pp en di x Ta bl e V .2. M on et ar y M ea su re s to A dd re ss E xc ha ng e M ar ke t Pr es su re s (C on td. ) Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 115 In o rd er t o pr ov id e liq ui di ty s up po rt t o ho us in g, e xp or t an d M SE s ec to rs. R BI p ro vi de d a re fi n an ce f ac ili ty t o N H B, E X IM B an k an d SI D BI u p to M ar ch 2 01 0. Sc op e of O M O w id en ed b y in cl ud in g pu rc ha se s of g ov er nm en t se cu ri ti es t hr ou gh a n au ct io n - ba se d m ec ha ni sm. Sp ec ia l m ar ke t op er at io ns t o m ee t th e fo re ig n ex ch an ge r eq ui re m en ts o f pu bl ic s ec to r oi l m ar ke ti ng c om pa ni es a ga in st o il bo nd s. H FC s re gi st er ed w it h th e N H B w er e al lo w ed t o ra is e sh or t-t er m f or ei gn c ur re nc y bo rr ow in gs u nd er t he a pp ro va l r ou te. s ub je ct t o co m pl ia nc e w it h pr ud en ti al n or m s la id d ow n by t he N H B. A D s al lo w ed to b or ro w fu nd s fr om th ei r he ad o ffi c e, o ve rs ea s br an ch es a nd c or re sp on de nt s an d ov er dr af ts in n os tr o ac co un ts u p to a lim it o f 50 p er c en t of t he ir u ni m pa ir ed T ie r 1 ca pi ta l o r U S 1 0 m ill io n, w hi ch ev er w as h ig he r. A fo re ig n ex ch an ge s w ap fa ci lit y w it h te nu re u p to th re e m on th s to In di an p ub lic a nd p ri va te s ec to r b an ks h av in g ov er se as o pe ra ti on s in o rd er t o pr ov id e th em fl ex ib ili ty in m an ag in g th ei r sh or t-t er m f un di ng r eq ui re m en ts a t th ei r ov er se as o ffi c es. Sy st em ic al ly i m po rt an t no n - de po si t ta ki ng N BF C s w er e pe rm it te d to r ai se s ho rt - t er m f or ei gn c ur re nc y bo rr ow in gs u nd er t he ap pr ov al r ou te. s ub je ct t o co m pl ia nc e w it h th e pr ud en ti al r eq ui re m en ts o f ca pi ta l a de qu ac y an d ex po su re n or m s. Ex ch an ge m ar ke t p re ss ur es s in ce M ay 2 2 in r es po ns e to ta lk o f t ap er in g R at e M ea su re s M SF w as r ai se d by 2 00 b ps t o 10 .2 5 pe r ce nt (r ev er se d by O ct ob er 2 9, 2 01 3). In te re st r at e ce ili ng o n N RI d ep os it s of 3 -5 y ea rs m at ur it y w as in cr ea se d by 1 00 b ps t o LI BO R/ SW A P pl us 4 00 b ps. Th e ce ili ng o n in te re st r at e on N RE d ep os it s re m ov ed. Q ua nt it y M ea su re s Re st ri ct io n on t he o ve ra ll ac ce ss t o LA F to 0 .5 p er c en t of e ac h ba nk s N D TL. O M O s al es o f 2 5 bi lli on. C RR. w hi ch b an ks h ad t o m ai nt ai n on a f or tn ig ht ly a ve ra ge b as is s ub je ct t o a da ily m in im um r eq ui re m en t of 7 0 pe r ce nt. w as m od ifi ed r eq ui ri ng b an ks t o m ai nt ai n a da ily m in im um o f 99 p er c en t of t he r eq ui re m en t (r ed uc ed la te r to 9 5 pe r ce nt ). Au ct io n of C M Bs o n a w ee kl y ba si s of a n ot ifi ed a m ou nt o f 2 20 b ill io n fo r a fe w w ee ks. W it h ef fe ct f ro m f or tn ig ht b eg in ni ng A ug us t 24. 2 01 3, in cr em en ta l F C N R (B ) an d N RE d ep os it s, o f th re e ye ar a nd a bo ve m at ur it y, w er e ex em pt ed f ro m m ai nt en an ce o f C RR a nd S LR. T hi s m ea su re w as a nn ou nc ed to g iv e im pe tu s to b an ks to m op u p N RI d ep os it s of lo ng - te rm m at ur it y. O n Au gu st 2 8, 2 01 3, a f or ex s w ap w in do w w as o pe ne d to m ee t th e en ti re d ai ly d ol la r re qu ir em en ts o f th re e pu bl ic s ec to r oi l m ar ke ti ng c om pa ni es. O n Se pt em be r 4 20 13. RB I op en ed a s pe ci al c on ce ss io na l w in do w f or s w ap pi ng f re sh F C N R( B) d ol la r de po si ts. m ob ili se d fo r a m in im um te no r of th re e ye ar s an d ab ov e at a fi xe d ra te o f 3. 5 pe r ce nt p er a nn um f or th e te no r of th e de po si t ( up to N ov em be r 30. 20 13 ). Th e ex is ti ng o ve rs ea s bo rr ow in g lim it o f 50 p er c en t of t he u ni m pa ir ed T ie r I ca pi ta l w as a ls o ra is ed t o 10 0 pe r ce nt a nd t he bo rr ow in gs m ob ili se d co ul d be s w ap pe d w it h RB I at a c on ce ss io na l r at e of 1 00 b ps b el ow t he o ng oi ng s w ap r at e pr ev ai lin g in t he m ar ke t (u p to N ov em be r 30. 2 01 3). A pp en di x Ta bl e V .2. M on et ar y M ea su re s to A dd re ss E xc ha ng e M ar ke t Pr es su re s (C on cl d. ) 116 Appendix Tables A pp en di x Ta bl e V .3. C ou nt er - C yc li ca l P ru de nt ia l R eg ul at io n: V ar ia ti on s in R is k W ei gh ts a nd P ro vi si on in g Re qu ir em en ts D at e C ap it al M ar ke t H ou si ng O th er R et ai ls C om m er ci al Re al E st at e N on - D ep os it t ak in g Sy st em ic al ly Im po rt an t N on - B an ki ng Fi na nc ia l C om pa ni es Ri sk W ei gh t Pr ov is io ns ( ) Ri sk W ei gh t Pr ov is io ns ( ) Ri sk W ei gh t Pr ov is io ns ( ) Ri sk W ei gh t Pr ov is io ns ( ) Ri sk W ei gh t Pr ov is io ns ( ) D ec -2 00 4 10 0 0. 25 75 0. 25 12 5 0. 25 10 0 0. 25 10 0 0. 25 Ju l-2 00 5 12 5 0. 25 75 0. 25 12 5 0. 25 12 5 0. 25 10 0 0. 25 N ov -2 00 5 12 5 0. 40 75 0. 40 12 5 0. 40 12 5 0. 40 10 0 0. 40 M ay -2 00 6 12 5 1. 00 75 1. 00 12 5 1. 00 15 0 1. 00 10 0 0. 40 Ja n - 20 07 12 5 2. 00 75 1. 00 12 5 2. 00 15 0 2. 00 12 5 2. 00 M ay -2 00 7 12 5 2. 00 50 -7 5 1. 00 12 5 2. 00 15 0 2. 00 12 5 2. 00 M ay -2 00 8 12 5 2. 00 50 -1 00 1. 00 12 5 2. 00 15 0 2. 00 12 5 2. 00 N ov -2 00 8 12 5 0. 40 50 -1 00 0. 40 12 5 0. 40 10 0 0. 40 10 0 0. 40 N ov -2 00 9 12 5 0. 40 50 -1 00 0. 40 12 5 0. 40 10 0 1. 00 10 0 0. 40 D ec -2 01 0 12 5 0. 40 50 -1 25 0. 4- 2. 0 12 5 0. 40 10 0 1. 00 10 0 0. 40 Ju l-2 01 1 12 5 0. 40 50 -1 25 0. 4- 2. 0 12 5 0. 40 10 0 1. 00 10 0 0. 40 Ju l-2 01 2 12 5 0. 40 50 -1 25 0. 4- 2. 0 12 5 0. 40 10 0 1. 00 10 0 0. 40 Ju l-2 01 3 12 5 0. 40 50 -7 5 0. 4- 2. 0 12 5 0. 40 10 0 1. 00 10 0 0. 40 Th e ri sk w ei gh ts f or h ou si ng lo an s va ry a cc or di ng t o am ou nt o f th e lo an a nd t he lo an - to - v al ue r at io a s be lo w. P ro vi si on in g re qu ir em en t fo r ho us in g lo an s w it h te as er in te re st r at es w as in cr ea se d to 2 .0 p er c en t in D ec em be r 20 10. I t re m ai ne d at t w o pe r ce nt t ill on e ye ar a ft er r es et o f in te re st r at e to h ig he r ra te a nd t he re af te r it w as 0 .4 p er c en t. F or o th er h ou si ng lo an s, t he p ro vi si on in g re m ai ne d at 0 .4 p er c en t. . A s pe r th e D BO D C ir cu la r N o. D BO D. B P. BC. N o. 1 04 d at ed Ju ne 2 1, 2 01 3, a n ew s ub se ct or c al le d C om m er ci al R ea l E st at e - Re si de nt ia l H ou si ng (C RE - R H ) ha s be en c ar ve d ou t of C RE a nd t hi s se gm en t at tr ac ts a lo w er r is k w ei gh t of 7 5 pe r ce nt a nd lo w er s ta nd ar d as se t pr ov is io ni ng o f 0. 75 p er c en t. Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 117 It em A ug us t 19 95 t o M ar ch 1 99 6 (M ex ic an C ri si s) A ug us t 19 97 - A ug us t 19 98 (E as t A si an C ri si s) H ig h C ap it al fl ow du ri ng 2 00 3- 04 t o 20 07 -0 8 G lo ba l C ri si s: 20 08 -0 9 Si nc e M ay 2 01 3 FC N R (B ) N RE Fo re ig n cu rr en cy de po si ts li ke FC N R( B) a nd N R( N R) R D w er e ex em pt ed f ro m C RR r eq ui re m en ts. In cr ea se in in te re st ra te s on N RE de po si ts. Re m ov al o f in cr em en ta l C RR o f 10 p er c en t on N RE RA a nd N R( N R) de po si ts. Re du ct io n in in te re st r at e ce ili ng on F C N R( B) a nd N R( E) RA d ep os it s. In cr ea se in in te re st ra te c ei lin g on FR N R (B ) a nd N RE de po si ts. Se pa ra te c on ce ss io na l s w ap w in do w t o at tr ac t FC N R( B) do lla r fu nd s. Ex em pt io n fr om m ai nt en an ce o f C R R a n d SL R o n i n cr em en ta l FC N R (B ) de po si ts a s al so N RE de po si ts w it h re fe re nc e to b as e da te o f J ul y 26. 2 01 3, a nd h av in g m at ur it y of th re e ye ar s a nd a bo ve. D er eg ul at io n of i nt er es t ra te o n N RE d ep os it s. In cr ea se i n in te re st r at e ce ili ng by 1 00 b ps t o LI BO R/ S W A P pl us 40 0 bp s on F C N R( B) d ep os it s of m at ur it y 3 to 5 y ea rs. EC B an d tr ad e cr ed it Re la xa ti on in t he EC B no rm s. In cr ea si ng t he ex is ti ng li m it f or pr ep ay m en t of ex te rn al co m m er ci al bo rr ow in gs (E C Bs ) w it ho ut t he R BI s ap pr ov al f ro m U S 4 00 m ill io n to U S 5 00 m ill io n, su bj ec t to co m pl ia nc e w it h th e m in im um Re la xa ti on in E C B po lic y in t er m s of up w ar d re vi si on in al l-i n - co st c ei lin g, el ig ib le b or ro w er s an d en d us e. EC B al lo w ed f or re pa ym en t of ou ts ta nd in g ru pe e lo an t ow ar ds ca pi ta l ex pe nd it ur e, u nd er ap pr ov al r ou te. Ex pa ns io n of e lig ib le e nd u se o f EC B to in cl ud e im po rt o f se rv ic es. t ec hn ic al k no w - h ow an d pa ym en t of li ce ns e fe es a s pa rt o f im po rt o f ca pi ta l g oo ds. su bj ec t to c er ta in c on di ti on s. Av ai lm en t of E C B fo r w or ki ng ca pi ta l f or c iv il av ia ti on s ec to r. Ex te ns io n of s ch em e fo r Bu yb ac k / P re pa ym en t of F C C Bs un de r th e ap pr ov al r ou te. u p to D ec em be r 31 ,2 01 3. A pp en di x Ta bl e V .4. C ap it al C on tr ol M ea su re s Ta ke n to A dd re ss E xc ha ng e M ar ke t V ol at il it y (C on td. ) 118 Appendix Tables It em A ug us t 19 95 t o M ar ch 1 99 6 (M ex ic an C ri si s) A ug us t 19 97 - A ug us t 19 98 (E as t A si an C ri si s) H ig h C ap it al fl ow du ri ng 2 00 3- 04 t o 20 07 -0 8 G lo ba l C ri si s: 20 08 -0 9 Si nc e M ay 2 01 3 av er ag e m at ur it y pe ri od. In tr od uc ti on o f Fo re ig n C ur re nc y Ex ch an ge ab le bo nd s. A ll - in - c os t ce ili ng fo r tr ad e cr ed it s w it h m at ur it y up to o ne y ea r an d be tw ee n on e an d th re e ye ar s ha s be en r ev is ed t o 35 0 bp s ab ov e 6- m on th L IB O R. Av ai lm en t of E C B fo r fi n an ci ng 3G s pe ct ru m o ut st an di ng r up ee lo an. Av ai la m en t of E C B by N BF C - A ss es F in an ce c om pa ni es. EC B ra is ed u nd er t he a pp ro va l ro ut e fr om f or ei gn e qu it y ho ld er c om pa ny w it h m in im um av er ag e m at ur it y of s ev en y ea rs al lo w ed t o us e fo r ge ne ra l co rp or at e pu rp os es. s ub je ct t o th e ce rt ai n co nd it io ns. FI I Ba n on u se o f Pr om is so ry N ot es. Lo ck - in p er io d of lo ng t er m in fr as tr uc tu re bo nd s fo r FI Is w as re du ce d to o ne ye ar. C ei lin g fo r FI Is in ve st m en t in G - s ec a nd co rp or at e bo nd s ra is ed b y U S 5 bi lli on e ac h to U S 20 b ill io n an d U S 45 b ill io n re sp ec ti ve ly. En ha nc e th e lim it f or f or ei gn in ve st m en t in G ov er nm en t da te d se cu ri ti es b y U S 5 b ill io n to U S 3 0 bi lli on. E nh an ce d lim it is a va ila bl e on ly f or lo ng te rm in ve st or s re gi st er ed w it h SE BI (S ov er ei gn W ea lt h Fu nd s (S W Fs ), M ul ti la te ra l A ge nc ie s, Pe ns io n/ In su ra nc e/ En do w m en t Fu nd s, F or ei gn C en tr al B an ks ). A pp en di x Ta bl e V .4. C ap it al C on tr ol M ea su re s Ta ke n to A dd re ss E xc ha ng e M ar ke t V ol at il it y (C on td .) Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 119 It em A ug us t 19 95 t o M ar ch 1 99 6 (M ex ic an C ri si s) A ug us t 19 97 - A ug us t 19 98 (E as t A si an C ri si s) H ig h C ap it al fl ow du ri ng 2 00 3- 04 t o 20 07 -0 8 G lo ba l C ri si s: 20 08 -0 9 Si nc e M ay 2 01 3 O th er s Fl oa ti ng o f Re su rg en t In di a Bo nd s. Ba n on u se o f of fs ho re d er iv at iv e pr od uc ts. Ba n on o ve rs ea s in di vi du al t o pa rt ic ip at e in In di an s to ck m ar ke t. Ru pe e D ol la r Sw ap Fa ci lit y. To c on ve rt 1 0 pe r ce nt o f th e ba la nc es in t he EE FC a cc ou nt s. Q ua lifi e d Fo re ig n In ve st or s (Q FI s) al lo w ed t o in ve st in m ut ua l f un ds. Br oa de ni ng o f in ve st or b as e fo r G - s ec t o in cl ud e So ve re ig n W ea lt h Fu nd s, in su ra nc e fu nd s an d pe ns io n fu nd s. In cr ea se d in ov er se as b or ro w in g lim it s fo r ba nk s fr om 2 5 pe r ce nt t o 50 p er c en t of Ti er - I ca pi ta l o r U S 1 0 m ill io n, w hi ch ev er is hi gh er. In cr ea se in o ve rs ea s bo rr ow in g lim it s fo r ba nk s fr om 5 0 pe r ce nt t o 10 0 pe r ce nt o f Ti er - I ca pi ta l. In cr ea se in o ve rs ea s bo rr ow in g lim it s fo r ba nk s fr om 5 0 pe r ce nt t o 10 0 pe r ce nt o f Ti er - I ca pi ta l o r U S 1 0 m ill io n, w hi ch ev er is h ig he r. A pp en di x Ta bl e V .4. C ap it al C on tr ol M ea su re s Ta ke n to A dd re ss E xc ha ng e M ar ke t V ol at il it y (C on td .) 120 Appendix Tables It em A ug us t 19 95 t o M ar ch 1 99 6 (M ex ic an C ri si s) A ug us t 19 97 - A ug us t 19 98 (E as t A si an C ri si s) H ig h C ap it al fl ow du ri ng 2 00 3- 04 t o 20 07 -0 8 G lo ba l C ri si s: 20 08 -0 9 Si nc e M ay 2 01 3 O ut fl ow s Li m it o n o u tw ar d F D I in cr e a s e d gr ad ua lly to 4 00 p er ce nt o f t he th ei r n et w or th u n d er t h e au to m at ic r ou te. G ra du al in cr ea se in lim it o f ou tw ar d po rt fo lio in ve st m en ts b y lis te d co m pa ni es to 5 0 pe r ce nt o f th e ne t w or th a nd di sp en si ng w it h th e re qu ir em en t of 10 p er c en t re ci pr oc al s ha re ho ld in g in t he lis te d In di an co m pa ni es b y ov er se as co m pa ni es. En ha nc em en t in lim it o n ov er se as in ve st m en t by m ut ua l f un ds re gi st er ed w it h th e SE BI t o U S 7 bi lli on. Re du ct io n in t he li m it o f ou tw ar d FD I f ro m 4 00 p er c en t to 1 00 p er c en t of n et w or th o f In di an c om pa ny. u nd er Au to m at ic R ou te. Re du ct io n in li m it o f U S 2 00 ,0 00 p er fi na nc ia l y ea r to U S 7 5, 00 0 pe r fi n an ci al y ea r un de r Li be ra liz ed R em it ta nc e Sc he m es. A pp en di x Ta bl e V .4. C ap it al C on tr ol M ea su re s Ta ke n to A dd re ss E xc ha ng e M ar ke t V ol at il it y (C on td .) Report of The Expert Committee to Revise and Strengthen the Monetary Policy Framework 121 A pp en di x Ta bl e V .4. C ap it al C on tr ol M ea su re s Ta ke n to A dd re ss E xc ha ng e M ar ke t V ol at il it y (C on cl d. ) It em A ug us t 19 95 t o M ar ch 1 99 6 (M ex ic an C ri si s) A ug us t 19 97 - A ug us t 19 98 (E as t A si an C ri si s) H ig h C ap it al fl ow du ri ng 2 00 3- 04 t o 20 07 -0 8 G lo ba l C ri si s: 20 08 -0 9 Si nc e M ay 2 01 3 En ha nc em en t of lim it o n ov er se as in ve st m en t un de r th e Li be ra lis ed Re m it ta nc e Sc he m e (L RS ) f or re si de nt in di vi du al s. In te re st p ay m en t of E EF C a cc ou nt s to t he e xt en t of ou ts ta nd in g ba la nc es o f U S 1 m ill io n pe r ex po rt er s (t em po ra ry m ea su re. v al id u p to O ct 3 1, 2 01 8. Fa ci lit y cl os ed o n N ov 1. 2 01 8. chap1 Chap2 chap3 chap4 chap5 chap6 Annex APP