Answer:

Inflation targeting is a practice whereby the Central bank of the country makes a commitment to keep the inflation within some desirable/reasonable limit as fixed by it. Given the double digit inflation witnessed in the country in the past few years, the RBI formulated the Urjit Patel committee to suggest measures to better manage the monetary policy of the country.

The major recommendations of the committee are as follows:

♤ Instead of managing inflation, growth, exchange rate etc. RBI should primarily focus on inflation. Hence the committee recommended bringing about transparency and accountability in RBI’s functioning by clearly defining its role.

♤ There should be a monetary policy review committee (MPC) headed by the RBI governor to formulate and monitor the monetary policy. In this way the executive will also have a say in the monetary policy determination.

♤ Instead of WPI, CPI should be used to monitor inflation as it better represents the inflationary pressure on the common man.

♤ The RBI should bring down the CPI inflation to 4% (+/- 2%) in a phased manner (the nominal anchor will be CPI).

♤ The government was advised to help the RBI achieve its target by bringing about fiscal consolidation.

♤ To fight inflation it recommended that the repo rate should be higher than the CPI rate.

Given the fact that in the past few years India’s inflation rate was highest among the G20 nations and the BRICS countries, the recommendations are a step in the right direction and hence will help to achieve the overall goal of inclusive socio-economic development of the nation.