The Monetary Policy Committee (MPC) is the body of the RBI, headed by the Governor, responsible for taking the important monetary policy decision about setting the repo rate. Repo rate is ‘the policy instrument’ in monetary policy that helps to realize the set inflation target by the RBI (at present 4%).
The MPC replaces the previous arrangement of Technical Advisory Committee. The Committee is to meet at least four times a year and make public its decisions following each meeting. There will be no reappointment of the committee.
Structure of the MPC
The Monetary Policy Committee (MPC) is formed under the RBI with six members. Three of the members are from the RBI while the other three members are appointed by the government.
Members from the RBI are the Governor who is the chairman of the MPC, a Deputy Governor and one officer of the RBI.
The government members are appointed by the Centre on the recommendations of a search-cum-selection committee which is to be headed by the Cabinet Secretary.
Under MPC, the governor has a casting vote and doesn’t enjoy veto power (there was veto power for him under TAC). Decisions will be taken on the basis of majority vote.
Responsibilities of MPC
To administer the inflation targeting monetary policy regime through determining the policy rate or repo rate to contain CPI based inflation target of 4% with a bandwidth of +/- 2%.
In case the inflation target is failed to achieve (2% higher or lower than the set target of 4% for continuous three quarters), the RBI has to give an explanation to the government about the reasons, the remedial actions and the estimated time for realizing the target.
To publish a Monetary Policy Report every six months, elaborating inflation forecasts and inflation sources for the next six to eighteen months.
Inflation Targeting
What is the time period for a set target: The Central Government, in consultation with the RBI, determines the inflation target in terms of the Consumer Price Index (CPI), once in every five years. This target would be notified in the Official Gazette. The current target will end on March 31, 2021.
How frequently MPC announces Policy Rates
Bi-monthly with the first such policy was announced on April 1, 2014. It was one of the measure announced by the panel headed by RBI deputy governor Urjit Patel.