The committee also set the inflation target at 4 percent with a band of plus or minus 2 percent around it. It also suggested that monetary policy decision making should be vested in a monetary policy committee (MPC) that should be headed the Governor.
"The RBI should adopt the new CPI (combined) as the measure of the nominal anchor for policy communication," the Expert Committee to Revise and Strengthen the Monetary Policy Framework said, adding that "bringing down inflation must be accorded primacy".
"In view of the elevated level of current CPI inflation the transition path to the target zone should be graduated to bringing down inflation from the current level of 10 percent to 8 percent over a period not exceeding the next 12 months.
"And to 6 per cent over a period not exceeding the next 24 months period before formally adopting the recommended target of 4 per cent inflation with a band of +/- 2 per cent," the panel headed by RBI Deputy Governor Urjit R Patel said.

The report said the "recommendation is intended to better ground inflation expectations by making clear that inflation is the RBI’s primary objective and that it expects to be held accountable for its performance in this regard".
Until recently, the Reserve Bank of India (RBI) communicated indicative inflation projections in terms of wholesale price index alone, essentially because it is the only measure of prices at a national level and CPIs have traditionally addressed prices facing specific sections of the society.
The panel said that consistent with the Fiscal Responsibility and Budget Management (Amendment) Rules, 2013, the government needs to ensure that its fiscal deficit as a ratio to GDP is brought down to 3 percent by 2016-17.
"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," the panel said.
RBI Governor Raghuram Rajan had appointed the panel in September. The main objective of the committee was to recommend what needs to be done to revise and strengthen the current monetary policy framework with a view to making it transparent and predictable.
The report said MPC should also have two external members.
"MPC will be accountable for failure to establish and achieve the nominal anchor," it said, adding that failure is defined as the inability to achieve the inflation target of 4 percent (+/- 2 percent) 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 inflation will return to the centre of the inflation target zone," the report said.
The panel also suggested that dependence on market stabilization scheme (MSS) and cash management bills (CMBs) may be phased out, consistent with government debt and cash management being taken over by the government's Debt Management Office.
The committee also recommended some new instruments be added to the tool kit of monetary policy. All fixed income financial products should be treated on par with bank deposits for the purposes of taxation and TDS.      

On Open Market Operations (OMOs), it said, they 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, it added.


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