Monetary Policy Committee

  • 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 was setup after a Memorandum of Understanding between the government and the RBI about the conduct of the new inflation targeting monetary policy framework in February 2015. First meeting of the MPC was held on October 4, 2016 after the Government made amendment of the RBI Act in June 27, 2016.
  • Committee’s meeting also marked the beginning of full-fledged implementation of the new inflation targeting monetary policy framework.

 How is it different from current practice followed by the RBI? Currently, a technical advisory committee constituted by the RBI, which consists central bank’s top brass including the deputy governor and the governor and external advisors, give their opinion and suggestions on what the RBI should do. But the governor’s word is final on the rates and the advice of the technical advisors is not binding on the RBI.
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. The term of the government appointed members is 4 years.
  • 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.
  • Under MPC, the governor has a casting vote and doesn’t enjoy veto power. Decisions will be taken on the basis of majority vote.

Function of the MPC 

  • The main responsibility of the MPC will be to keep the inflation targets set by the RBI.
  • The inflation target set for now is 4%, with a possible maximum deviation of 2 % higher or lower than 4%.
  • 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.
  • Another responsibility for the RBI is to publish a Monetary Policy Report every six months, elaborating inflation forecasts and inflation sources for the next six to eighteen months.

Some facts at a glance

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