1. What is RBI’s Monetary Policy Committee and how does it work? Urjit Patel set to release MPC’s first review

What is RBI’s Monetary Policy Committee and how does it work? Urjit Patel set to release MPC’s first review

MPC or the Monetary Policy Committee is the new framework under which the RBI's credit policy will be decided.

By: | Updated: October 4, 2016 10:37 AM
monetary policy committee, monetary policy committee India, monetary policy committee RBI Today’s bi-monthly credit policy will be the first under MPC and incidentally will also be the first monetary policy of the new RBI governor, Urjit Patel. (Reuters Photo)

MPC or the Monetary Policy Committee is the new framework under which the RBI’s credit policy will be decided. Today’s bi-monthly credit policy will be the first under MPC and incidentally will also be the first monetary policy of the new RBI governor, Urjit Patel. The new governor, Patel, also happens to be the architect of MPC. The central bank’s monetary policy is a complex instrument that is meant to strike a balance between several economic indicators such as inflation, growth, exchange rate, and employment among others. Given the crucial task at hand, leaving the monetary policy decision making process in the hands of a single individual sometimes invites severe criticism. Globally, many central banks have therefore adopted the idea of an MPC, hence distributing the decision making power in the hands of a group of experts, instead of only the governor.

What is MPC and who are its members?

The MPC is a six-member committee, of which three members are from the RBI, and the other three are appointed by the Central government. According to the official notification, the members of MPC that have been appointed by the government will hold office for a period of four years. The six member panel consists of; RBI governor (presently Urjit Patel), Deputy Governor of the Bank, in charge of Monetary Policy, One officer of the Bank to be nominated by the Central Board, Chetan Ghate, Professor, Indian Statistical Institute (appointed by government), Professor Pami Dua, Director, Delhi School of Economics (appointed by government), and Dr. Ravindra H. Dholakia, Professor, IIM-Ahmedabad (appointed by government).

Also read: In Urjit Patel, Modi government chooses Raghuram Rajan 2

How does the MPC work?

The MPC met for the first time on Monday, ahead of the policy today, and will meet again today to take a final call on the decision to cut interest rates or not. In case there is a tie of votes in the six-member committee’s decision, then the RBI governor, in today’s case Urjit Patel, will have the final power to take the decision. In that sense, while the MPC seeks to ensure that the decision making is more balanced, in case of a tie, the governor still has the veto right. The meetings of the MPC will be held at least 4 times a year and it shall publish its decisions after each such meeting. In a departure from the past, the monetary policy review will be released at 2:30 PM, instead of 11 AM.

How will the MPC help in bettering the monetary policy decision making process?

According to the government, a committee-based approach will add lot of “value and transparency” to monetary policy decisions. The Reserve Bank of India Act, 1934 (RBI Act) has been amended by the Finance Act, 2016, to provide for a statutory and institutionalised framework for the MPC. The aim is to maintain price stability, while keeping in mind the growth objective. The MPC has been entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level.

The main aim of the MPC is inflation targeting. According the RBI and government have agreed on a target of 4% for the duration starting from August 5, 2016 to March 31, 2021. The ‘upper tolerance’ level for the target is 6%, while the ‘lower tolerance’ level is 2%.

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