What is Monetary Policy Committee?

What is MPC?

• The Monetary Policy Committee (MPC) is a committee of the Central Bank in India (Reserve Bank of India), headed by its Governor, which is entrusted with the task of fixing the benchmark policy interest rate (repo rate) to contain inflation within the specified target level i.e. inflation targeting.
• The Reserve Bank of India Act, 1934 (RBI Act) was amended by the Finance Act, 2016, to provide for a statutory and institutionalized framework for a Monetary Policy Committee, for maintaining price stability, while keeping in mind the objective of growth.
• MPC was set up consequent to the agreement reached between Government and RBI to task RBI with the responsibility for price stability and inflation targeting.

Structure of MPC

• Formation of the committee witnessed a sturdy debate with regard to the number of members that will constitute the committee.
• Finally it was decided that the committee will have 6 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 MPC, 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
• Search cum selection committee consisting of the cabinet secretary (Chairperson), the RBI Governor,  the secretary of the Department of Economic Affairs, Ministry of Finance, and three experts in the field of economics or banking as nominated by the central government.
• Each member has one vote of equal weight, for which they can be held publicly accountable
• The Governor chairs the meeting and is the last to cast his vote, acting as a casting vote in event of a tie

Decision Making of MPC

• The proceedings of MPC are confidential and the quorum for a meeting shall be four Members, at least one of whom shall be the Governor and in his absence, the Deputy Governor who is the Member of the MPC.
• The MPC takes decisions based on majority vote (by those who are present and voting). In case of a tie, the RBI governor will have the secondor casting vote. The decision of the Committee would be binding on the RBI.
• As per the Act, RBI has to organise at least four meetings of the MPC in a year.

RBI Act, 1934

Reserve Bank of India Act, 1934 is the legislative act under which the Reserve Bank of India was formed.

What is Inflation?

• Inflation is defined as a sustained increase in the general level of prices for goods and services in a country, and is measured as an annual percentage change.
• Under conditions of inflation, the prices of things rise over time.
• When prices rise, and alternatively when the value of money falls you have inflation.

What is Inflation Targeting?

• Inflation targeting is essentially a monetary policy of the Central Banks to maintain Inflation rate at a certain level or range.
• Under Section 45ZA(1) of the RBI Act, 1934, the Central Government determines the inflation target in terms of the Consumer Price Index, once in every five years in consultation with the RBI.
• The monetary policy framework would be operated by the RBI. RBI would aim to contain consumer price inflation within 6 percent by January 2016 and within 4 percent with a band of (+/-) 2 percent for all subsequent years.