Monetary Policy Committee

Subject: Economy

Context:

Monetary policy committee is soon to be reconstituted as the terms of three independent people on the panel expire at the end of next month and one internal member retired in June.

Concept:

• Monetary policy refers to the use of monetary instruments under the control of the central bank to regulate magnitudes such as interest rates, money supply and availability of credit with a view to achieving the ultimate objective of economic policy

What is Monetary Policy Committee?

• The Monetary Policy Committee (MPC) constituted by the Central Government under Section 45ZB of RBI Act determines the policy interest rate required to achieve the inflation target.
• Accordingly, the Central Government in September 2016 constituted the MPC as under Governor of the Reserve Bank of India – Chairperson, ex officio;
• The primary 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 has notified in the Official Gazette 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.
• The MPC is required to meet at least four times in a year.
• The composition of the MPC is as follows;
• Governor of the Reserve Bank of India – Chairperson, ex officio;
• Deputy Governor of the Reserve Bank of India, in charge of Monetary Policy –
  (Member, ex officio)
• One officer of the Reserve Bank of India to be nominated by the Central Board – Member, ex officio;
• Except ex-officio members, three independent members will hold the office for a period of 4 years or until further orders, whichever is earlier.
• 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.