How does MPC function and what is its mandate?
In India, RBI's Monetary Policy Committee had raised the repo rate by 50 basis points early this month. But ever wondered who all are part of this committee and what is its mandate? Let us find out.
Manojit Saha New Delhi
The monetary policy committee of Reserve Bank of India is a six-member panel which sets the repo rate. Repo is a short-term lending rate that the central bank charges to the banks. It acts as a benchmark for all other interest rates in the economy.
Out of the six members, three are internal -- including the RBI governor who chairs the committee. RBI’s deputy governor is the second internal member. The third member is one RBI official who is nominated by the central board of RBI. Usually, it is the executive director in-charge of monetary policy.
The other three are external members who are appointed for four years.
According to the RBI, the Monetary Policy Committee (MPC) constituted by the Central Government under Section 45ZB determines the policy interest rate required to achieve the inflation target. RBI’s Monetary Policy Department (MPD) assists the MPC in formulating the monetary policy.
The main objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. Price stability is a necessary precondition to sustainable growth.
In May 2016, the Reserve Bank of India (RBI) Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework.
The amended RBI Act also provides for the inflation target to be set by the Government of India, in consultation with the Reserve Bank, once in every five years.
Accordingly, the Central Government notified 4 per cent Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016 to March 31, 2021 with the upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent.
On March 31, 2021, the Central Government retained the inflation target and the tolerance band for the next 5-year period, between April 1, 2021 and March 31, 2026.
According to the amended RBI Act, the MPC is required to meet at least four times in a year. The quorum for the meeting of the MPC is four members. Each member of the MPC has one vote, and in the event of an equality of votes, the Governor has a second or casting vote.
The minutes of the proceedings of the MPC are published on the 14th day after the meeting, which includes the resolution adopted by the MPC; the vote of each member on the resolution and the statement of each member on the resolution adopted.
Once in every six months, the RBI is required to publish a document called the Monetary Policy Report to explain the sources of inflation and the forecast of inflation for 6-18 months ahead.
First Published: Jun 20 2022 | 7:00 AM IST