Monetary Policy Committee (MPC) is the body of the RBI
The Monetary Policy Committee (MPC) is the body of the RBI, headed by the Governor, responsible for taking the important monetary policy decision about setting the repo rate. Repo rate is ‘the policy instrument’ in monetary policy that helps to realize the set inflation target by the RBI (at present 4%).
Monetary Policy Committee – Need
Prior to the establishment of the Monetary Policy committee increase or decrease of Interest rates are to be taken by the Governor of RBI alone. The Governor of RBI is appointed and can be disqualified by the Government anytime. This led to uncertainty and resulted in friction between the Government and the RBI, especially during the times of low growth and high inflation.
Before the constitution of the MPC, a Technical Advisory Committee (TAC) on monetary policy with experts from monetary economics, central banking, financial markets and public finance advised the Reserve Bank on the stance of monetary policy. However, its role was only advisory in nature.
The setting up of a committee to decide on Monetary Policy was first proposed by the Urjit Patel Committee.
Monetary Policy Committee – Composition
Monetary Policy Committee (MPC) is formed under the RBI with six members. Three of the members are from the RBI while the other three members are appointed by the government.
Members from the RBI are the Governor who is the chairman of the Monetary Policy committee, a Deputy Governor and one officer of the RBI.
The government members are appointed by the Centre on the recommendations of a search-cum-selection committee which is to be headed by the Cabinet Secretary.
Under Monetary Policy Committee, the governor has a casting vote and doesn’t enjoy veto power (there was veto power for him under TAC). Decisions will be taken on the basis of majority vote.
The Committee is to meet at least four times a year and make public its decisions following each meeting. There will be no reappointment of the committee.
Monetary Policy Committee – Functions
The main responsibility of the MPC will be to keep the inflation targets set by the RBI.
The Monetary Policy Committee (MPC) decides the changes to be made to the policy rate (repo rate) to contain inflation within the target (based on CPI) level set under India’s inflation targeting regime.
Members of the Monetary Policy Committee (MPC) can suggest reasons for their support or opposition for a policy rate change. This will be published in the minutes of the Monetary Policy Committee (MPC) and the minutes should be published after 14 days of MPC meeting.
The minutes should contain the reasons for each member proposing or opposing the monetary policy decision taken by the NPC.