Chakravarty Committee on Monetary Policy (1985)

The Sukhamoy Chakravarty Committee was formed in December 1982 under the chairmanship of Prof. Sukhamoy Chakroborty to assess the functioning of the Indian Monetary system. Its goal was to improve monetary regulation, a feat that was hoped would enable price stability. The committee, which submitted its report in April 1985, believed that price stability was essential for promoting growth and achieving other social objectives.

During the 1970s and early 1980s, the Indian economy had numerous issues relating to the functioning of the monetary system. The government borrowing program was increasing rapidly. These increasing requirements from the government could be met by a) Increasing credit from the Reserve Bank of India to the government and b) Increasing the Statutory Liquidity Ratio that was meant to be maintained by the banks. As a result, the reserves of the government were increasing and this led to an increase in the Money Supply which in turn, resulted in inflationary pressures in the economy. The Reserve Requirement was increased from time to time to counter the effect of this increase in money supply due to the Reserve Bank of India's decision to finance the deficit of the government. These were the most prominent reasons for the appointment of the Chakravarty Committee for reviewing the monetary system. As Chakravarty himself stated, his analysis of the monetary system was to be done "from the point of view of ensuring non inflationary planned development in the years to come."

Monetary targeting essentially refers to fixing ex ante the most favorable target rate of growth of Money Supply as the foundation of the policy of monetary regulation. This was one of the most important recommendations due to the fact that price stability is influenced significantly by the growth of Money Supply, even though it is not the only factor; it can be affected by several other non monetary factors as well. The committee stated that an average increase of no more than 4% per year in the Wholesale Price Index should be treated as acceptable. However, annual inflation was 8%, 9% and 10% during the 1970s, 1980s, and 1990s(1990–1995) respectively. The committee did not share the same view on Monetary Targeting as was practiced in countries around the world. It did not believe in setting rigid targets. Monetary targeting for them was more of an inflexible rule which had to be constantly changed depending on factors in the economy, such as growth etc. Optimally, the growth of money supply should be adapted to the expected growth in the Demand for money associated with the expected growth in Real income at stable prices. This implies that the target rate of growth of money supply requires

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