Details of The Monetary Policy Committee
About:
- The Reserve Bank of India Act, 1934 was amended to create the MPC by the Finance Act (India), 2016.
- It is tasked with establishing monetary policy using tools including the repo rate, reverse repo rate, bank rate, and cash reserve ratio (CRR).
- It was created by the Central Government of India in compliance with Section 45ZB of the RBI Act as amended in 1934.
Functions:
- The MPC is responsible for selecting the various policy rates, including MSF, Repo Rate, Reverse Repo Rate, and Liquidity Adjustment Facility.
- Composition of MPC:
- There will be six people on the committee. Three of the six members will be proposed by the government. There will be no nominations for elected officials accepted by the MPC.
- The other three members would be from the RBI, and the governor would act as the ex-officio chairperson. Members will include the deputy governor of the RBI, who is in charge of monetary policy, as well as the executive director of the central bank.
Selection of members and terms:
- Selection: A Search-cum-Selection Committee headed by the Cabinet Secretary would choose the government candidates for the MPC together with the RBI Governor, the Economic Affairs Secretary, and three experts in the fields of economics, banking, finance, and monetary policy.
- Members of the MPC are appointed for a four-year term and are not eligible for re-appointment.
How are decisions made?
- Decisions are taken by majority voting, with each member having one vote.
- The governor of the Reserve Bank of India will act as the committee’s chairman. In the event of a tie, the governor will have a casting vote; however, he or she will not have the power to overrule the decisions made by the other panellists.
What is the RBI’s monetary policy?
- The “monetary policy” of the Reserve Bank of India (RBI) refers to how it uses the monetary resources that are within its control to raise GDP and lower inflation.
- The Reserve Bank of India Act of 1934 grants the RBI the power to decide on monetary policy.
What objectives does monetary policy seek to achieve?
- In accordance with the Chakravarty Committee’s recommendations, India’s monetary policy should support the creation of new financial institutions as well as economic development, equity, and social justice.
- While the Indian government aims to accelerate the nation’s GDP growth rate, the RBI is continuously attempting to reduce inflation within a manageable range.
- To achieve the nation’s main objectives and assist it hit its inflation target, the Monetary Policy Committee selects the optimum policy interest rate.
How are the tools of monetary policy managed?
- Monetary policy tools fall into two categories: qualitative instruments and quantitative instruments.
- The list of quantitative instruments includes Open Market Operations, Bank Rate, Repo Rate, Reverse Repo Rate, Cash Reserve Ratio, Statutory Liquidity Ratio, Marginal Standing Facility, and Liquidity Adjustment Facility (LAF).
- Examples of qualitative instruments are moral persuasion, direct action, and margin modifications.
