Monetary policy committee special meeting

Monetary policy committee special meeting

Subject: Economy

Context:

The Reserve Bank of India announced an extra meeting of the Monetary Policy Committee (MPC) on November 3, in addition to the scheduled bi-monthly meetings.

Details:

As per the meeting schedule of the MPC for FY23, the committee’s next meeting was to be held from December 5-7.

Concept:

• The additional meeting has been scheduled under the provisions of:
  • Section 45ZN of the Reserve Bank of India (RBI) Act 1934–states that if RBI fails to meet the inflation target, it will need to submit a report to the government explaining the reasons for the failure, remedial actions proposed to be taken, and an estimate of the time-period within which the target may be achieved.
  • Regulation 7 of the RBI MPC and Monetary Policy Process Regulation, 2016– states that the MPC must schedule a separate meeting as part of the normal policy process–to discuss and draft the report–to be sent to the central government within one month from breaching the inflation target.

Breach of target/Failure of the Monetary policy :

• As per the flexible inflation targetting framework of the MPC, the RBI fails the inflation targetting mandate if the Consumer Price Index (CPI)-based inflation remains outside the 2-6 percent tolerance band for three consecutive quarters. 
  • The CPI print has now also been above the RBI’s medium-term target of 4 per cent for 36 consecutive months, or three years.
  • Breach of target data:

The headline inflation rose to 7.4 per cent in September from 7.0 per cent in August.

Monetary Policy Committee (MPC)

• Urijit Patel Committee first proposed the idea for the formation of a five-member Monetary Policy Committee. The monetary Policy Committee came into force on 27th June 2016.
• Constituted by RBI under section 45ZB of the Reserve Bank of India (RBI) Act, 1934.
  • Section 45ZB lays down that “the Monetary Policy Committee shall determine the Policy Rate required to achieve the inflation target”, and that “the decision of the Monetary Policy Committee shall be binding on the Bank”.
• Composition: Section 45ZB says the MPC shall consist of 6 members:
  • RBI Governor as its ex officio chairperson,
  • Deputy Governor in charge of monetary policy,
  • An officer of the Bank to be nominated by the Central Board,
  • Three persons to be appointed by the central government.
    • This category of appointments must be from “persons of ability, integrity and standing, having knowledge and experience in the field of economics or banking or finance or monetary policy”.

• Mission: Fixing the benchmark policy interest rate (repo rate) to restrain inflation within the particular target level (2% to 6%).
  •  Repo rate is the base or reference rate that is used to set other interest rates — in India.
• MPC conducts meetings at least 4 times 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.
• On the 14th day, the minutes of the proceedings of the MPC are published 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.
• MPC is assisted by the Monetary Policy Department (MPD) of the Reserve Bank in the formulation of the policy. The Financial Markets Operations Department (FMOD) operationalizes the monetary policy, mainly through day-to-day liquidity management operations.

Note:

• 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 — April 1, 2021 to March 31, 2026.
• MPC decides the benchmark rate to keep inflation in the given target.