Monetary Policy Committee of India
Monetary Policy Committee of India is a committee within the Reserve Bank of India (RBI), chaired by the Governor. whose primary responsibility is to set the benchmark policy interest rate, known as the repo rate, to keep inflation within a specified target range. As per Section 45ZB of the amended RBI Act, 1934, the Union government has the authority to establish a six-member Monetary Policy Committee of India (MPC). This committee is tasked with determining the policy interest rate necessary to achieve the inflation target set by the government.
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Background of Monetary Policy Committee of India
The idea of setting up a Monetary Policy Committee of India has been under consideration for quite some time. Recommendations for the establishment of an MPC date back to 2002 with the Y. V. Reddy Committee, followed by suggestions from the Tarapore Committee in 2006, the Percy Mistry Committee in 2007, the Raghuram Rajan Committee in 2009, and in reports from the Financial Sector Legislative Reforms Commission (FSLRC) and the Dr. Urjit R. Patel (URP) Committee in 2013.
The establishment of the Monetary Policy Committee of India came as a result of an agreement between the Government of India and the Reserve Bank of India (RBI) to entrust the RBI with the responsibility for of maintaining price stability and targeting inflation. This agreement was formalized through the signing of the Monetary Policy Framework Agreement on February 20, 2015.
To provide statutory backing to this agreement and to establish the MPC, the government proposed amendments to the Reserve Bank of India (RBI) Act, 1934. This proposal was announced during the unveiling of the Union Budget for 2016-17 in the Parliament.
Monetary Policy Committee Chairman and Members
The Monetary Policy Committee of India (MPC) comprises a total of six members. Among these, three members are from the Reserve Bank of India (RBI), including the RBI Governor who serves as the Chairperson, the Deputy Governor in charge of monetary policy, and one official nominated by the RBI Board.
The remaining three members are appointed by the Government of India. These appointments are proposed by a committee chaired by the Cabinet Secretary.
Members of the MPC serve for a term of four years and are not eligible for reappointment. This ensures a degree of independence and stability in the decision-making process of the MPC.
The present Monetary Policy Committee of India members, as notified by the Central Government in the Official Gazette of October 5, 2020, are as under:
1. Governor of the Reserve Bank of India—Chairperson, ex officio;
2. Deputy Governor of the Reserve Bank of India, in charge of Monetary Policy—Member, ex officio;
3. One officer of the Reserve Bank of India to be nominated by the Central Board—Member, ex officio;
4. Prof. Ashima Goyal, Professor, Indira Gandhi Institute of Development Research —Member;
5. Prof. Jayanth R. Varma, Professor, Indian Institute of Management, Ahmedabad—Member; and
6. Dr. Shashanka Bhide, Senior Advisor, National Council of Applied Economic Research, Delhi—Member.
(Members referred to at 4 to 6 above, will hold office for a period of four years or until further orders, whichever is earlier)
- The MPC determines the policy repo rate required to achieve the inflation target.
- 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.
- Each Member of the Monetary Policy Committee writes a statement specifying the reasons for voting in favour of, or against the proposed resolution.
Functions of Monetary Policy Committee of India
To achieve the goal of maintaining price stability and targeting inflation, the Reserve Bank of India (RBI) is tasked with the responsibility of containing inflation within a specific range, typically set at 4% with a permissible deviation of 2% (i.e., within a range of 2% to 6%).
Price stability, which entails keeping inflation in check, is essential for fostering sustainable economic growth. When prices remain stable, businesses and consumers can make more informed decisions, leading to greater confidence in the economy and facilitating investment and consumption.
In today’s increasingly complex economic environment, with various factors influencing inflation dynamics, the RBI faces challenges in effectively managing inflation while supporting growth. Nevertheless, by employing appropriate monetary policy tools and closely monitoring economic indicators, the RBI endeavors to strike a balance between price stability and sustainable growth.
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Also read: Monetary Policy Types and Instruments
Written By: Dr. Kumar Ashutosh