MONETARY POLICY COMMITTEE

Subject: Economy

Context :

Government nominates Ashima Goyal, Jayanth Verma, Shashank Bhide as new members of MPC

Concept:

Monetary Policy Committee (MPC)

• The Monetary Policy Committee (MPC) is a committee of the RBI, which is entrusted with the task of fixing the benchmark policy interest rate (repo rate) to contain inflation within the specified target level.
• The RBI Act, 1934 was amended by Finance Act (India), 2016 to constitute MPC to bring more transparency and accountability in fixing India’s Monetary Policy.
• The policy is published after every meeting with each member explaining his opinions.
• The committee is answerable to the Government of India if the inflation exceeds the range prescribed for three consecutive months.
• Suggestions for setting up a Monetary policy committee is not new and goes back to 2002 when YV Reddy committee proposed to establish an MPC, then Tarapore committee in 2006, Percy Mistry committee in 2007, Raghuram Rajan committee in 2009 and then Urjit Patel Committee in 2013.

Composition and Working

• The committee comprises six members – three officials of the RBI and three external members nominated by the Government of India.
• The meetings of the Monetary Policy Committee are held at least 4 times a year and it publishes its decisions after each such meeting.
• The Governor of RBI is the chairperson ex officio of the committee.
• Decisions are taken by a majority with the Governor having the casting vote in case of a tie.
• They need to observe a “silent period” seven days before and after the rate decision for “utmost confidentiality”.

Instruments of monetary policy are of two types:

• Quantitative Instruments: General or indirect (Cash Reserve Ratio, Statutory Liquidity Ratio, Open Market Operations, Bank Rate, Repo Rate, Reverse Repo Rate, Marginal standing facility and Liquidity Adjustment Facility (LAF))
• Qualitative Instruments: Selective or direct (change in the margin money, direct action, moral suasion)