Monetary Policy Committee: RBI
GS Paper – 3, Banking Sector & NBFCs Statutory Bodies, Monetary Policy, Growth & Development
Why is it in the news?
- The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) has said that the central bank’s liberal monetary policy stance may result in the failure to meet the target for inflation set by the government (upper limit of 6 percent ).
- Taking an accommodating posture suggests that the central bank is prepared to increase the money supply while simultaneously decreasing interest rates.
- In India, the Monetary Policy Committee (MPC) sets the benchmark interest rate, also known as the base or reference rate, which is used to calculate other interest rates.
What is the definition of monetary policy?
- The term “monetary policy” refers to the central bank’s approach to the use of monetary instruments under its control in order to fulfil the objectives set forth in the Act of the Central Bank.
- The fundamental goal of the Reserve Bank of India’s monetary policy is to ensure price stability while also keeping the goal of economic growth in mind.
- Price stability is a requirement for long-term growth that cannot be ignored.
- Furthermore, the Reserve Bank of India Act (as modified) of 1934 specifies that the inflation goal (4 percent plus -2 percent) is to be determined by the Government of India, in conjunction with the Reserve Bank, at least once every five years.
What is the Monetary Policy Committee (MPC) and what does it do?
- A six-member Monetary Policy Committee is established by the central government under Section 45ZB of the Reserve Bank of India Act, 1934, as modified in 2016. (MPC).
- As a further provision, Section 45ZB states that “the Monetary Policy Committee shall decide the Policy Rate necessary to attain the inflation objective.”
- The Monetary Policy Committee’s decision is final and binding on the Bank of England and its subsidiaries.
- Section 45ZB specifies that the MPC should be composed of six members, who are as follows:
- The Governor of the Reserve Bank of India serves as the organization’s ex officio chairman.
The Deputy Governor in charge of monetary policy is:
- An official of the Bank who will be appointed by the Central Board of Directors,
- The federal government will nominate three individuals to serve on the committee.
- Persons with “ability, integrity, and standing, who have knowledge and expertise in the field of economics, banking, finance, or monetary policy” are eligible to be considered for this category of appointments.
What exactly is the Monetary Policy Framework (MPF)?
Origin: In May 2016, the Reserve Bank of India Act was changed to provide the central bank a statutory mandate to administer the country’s monetary policy framework.
- The framework’s objectives are to determine the policy (repo) rate based on an evaluation of the existing and changing macroeconomic environment, as well as to modulate liquidity conditions in order to keep money market rates at or near the repo rate.
- The following is the rationale for using the repo rate as the policy rate: changes in the repo rate ripple through the money market to the whole financial system, which in turn impacts aggregate demand.
- As a result, it is a significant predictor of inflation and growth.
