In 1982, the Reserve Bank of India (RBI) with Manmohan Singh as Governor, commissioned a committee with Sukhamoy Chakravarty as the chair to undertake a comprehensive review of India’s monetary system. The aim was to assess and enhance the effectiveness of monetary policy in fostering planned economic development. This followed previous examinations of specific monetary areas by various groups, which had indicated the need for a committee to conduct an in-depth study that would build upon these efforts. Committee members included M. P. Chitale; R. K. Hazari; F. A. Mehta; and C. Rangarajan. 

The committee noted significant structural shifts in the economy since India’s independence. The share of the public sector in GDP increased substantially from 8.5 percent in the First Five-Year Plan period (1951–56) to 23.2 percent during the period of the Sixth Five-Year Plan (1980/81 to 1983/84). Despite increased mobilization of savings and deployment of savings according to plan priorities, there was a disconcerting inflationary trend. The marketable debt of the Government of India grew fivefold between March 1971 and March 1984. The committee also noted that the market for government securities had a limited number of participants.

The committee noted that the most important factor influencing the conduct of monetary policy since 1970 was a phenomenal increase in reserve money. The major component of this increase was RBI credit to the government, over which the central bank had little control. Net credit to the government formed 92 percent of the reserve money in March 1984.

The committee recommended several key measures to address these challenges. It advocated using Treasury bills as an active monetary instrument issued at a flexible rate to make them more attractive to the market and suggested that government securities should offer yields aligned with market expectations to attract greater funds. Additionally, it called for restructuring the interest rate system to simplify it and better reflect economic realities while adopting monetary targeting as a critical tool for monetary policy. It noted that, initially, interest costs of the government would increase as a result, as successive tranches of government debt would carry higher coupon rates, but, with an ensuing reduction in inflation, in the long run the net impact on interest cost would not be large.

Furthermore, the report stressed improving operational efficiency within the banking system, revaluing the cash credit system, and encouraging development of a bill-rediscounting market and money market to promote effective credit use. It underscored the imperative of augmenting the pool of financial savings through effecting appropriate interest rate structures and offering a broader spectrum of attractive savings instruments, and it advocated governmental borrowing practices that would not unduly increase central bank credit to the government. Through these recommendations, the Chakravarty Committee sought to pursue the twin goals of economic development and inflation control.

Since the Chakravarty Committee report was submitted, several key fiscal and monetary policy changes have been made. The RBI has greater control over monetary policy, as the fiscal deficit is no longer automatically monetized. Administered interest rates have been withdrawn, so the government borrows at market-determined interest rates. This has made it possible to use the interest rate as a policy variable and led to the interest rate becoming the primary monetary policy instrument today. Today, the objective of monetary policy is to maintain price stability, and it is the inflation rate, not the quantity of money, that is targeted.

The Chakravarty Committee highlighted issues such as excessive reliance on RBI credit to the government, a fragmented interest rate system, and limited market participation in government securities. It emphasized restructuring India’s monetary policy to balance economic growth with inflation control, advocating measures like monetary targeting, market-driven interest rates, and improved financial savings.