Monetary policy basics
- Monetary policy means using central bank tools to influence interest rates, money supply, and credit conditions to achieve broader macroeconomic goals.
- In India, the Reserve Bank of India (RBI) is legally responsible for conducting monetary policy under the RBI Act, 1934.
Core objective
- The primary aim is price stability, while keeping in view economic growth.
- The logic is that stable prices create the foundation for sustainable growth.
Inflation targeting framework
- In May 2016, the RBI Act, 1934 was amended to give legal backing to flexible inflation targeting.
- Under this framework, the inflation target is set by the Government of India, in consultation with the RBI, once every five years.
What MPC is and why it exists
- The MPC is constituted by the Central Government under Section 45ZB of the RBI Act.
- Its central role is to decide the policy interest rate required to meet the inflation target.
- It replaced the earlier system where decisions were guided by the Technical Advisory Committee.
Main function
- The MPC’s key task is to fix the benchmark policy rate (repo rate) to keep inflation within the targeted level.
- MPC decisions are binding on the RBI
- The RBI’s Monetary Policy Department (MPD) provides technical and analytical support to the MPC in policy formulation.
Composition
- Total members: 6
- RBI members
- RBI Governor (Chairperson)
- Deputy Governor in charge of monetary policy
- One RBI official nominated by the RBI’s Central Board
- Government of India nominees
- 3 external members nominated by the Government of India
- Tenure
- External members serve for 4 years
Meeting rules and voting
- The MPC must meet at least 4 times a year.
- Quorum is 4 members, and it must include
- the Governor, or
- in the Governor’s absence, the Deputy Governor (monetary policy).
- Decisions are taken by majority vote.
- If votes tie, the Governor has a casting (second) vote
Monetary Policy Committee (MPC)
