Major monetary policy reforms introduced in recent times

MPC is a statutory and institutionalized framework under the Reserve Bank of India Act, 1934, for maintaining price stability, while keeping in mind the objective of growth.

The 6-member Monetary Policy Committee (MPC) constituted by the Central Government as per the Section 45ZB of the amended RBI Act, 1934. The first meeting of the Monetary Policy Committee (MPC) was held on in Mumbai on October 3, 2016.

The Governor of RBI is ex-officio Chairman of the committee. The MPC determines the policy interest rate (repo rate) required to achieve the inflation target (4%).

An RBI-appointed committee led by the then deputy governor Urjit Patel in 2014 recommended the establishment of the Monetary Policy Committee.

Functions: The MPC is entrusted with the responsibility of deciding the different policy rates including MSF, Repo Rate, Reverse Repo Rate, and Liquidity Adjustment Facility.

Composition of MPC: The committee will have six members. Of the six members, the government will nominate three. No government official will be nominated to the MPC.

The other three members would be from the RBI with the governor being the ex-officio chairperson. The Deputy governor of RBI in charge of the monetary policy will be a member, as also an executive director of the central bank.

Selection: The government nominees to the MPC will be selected by a Search-cum-Selection Committee under Cabinet Secretary with RBI Governor and Economic Affairs Secretary and three experts in the field of economics or banking or finance or monetary policy as its members.

Term: Members of the MPC will be appointed for a period of four years and shall not be eligible for reappointment.

How decisions are made? Decisions will be taken by majority vote with each member having a vote.

RBI governor’s role: The RBI Governor will chair the committee. The governor, however, will not enjoy a veto power to overrule the other panel members but will have a casting vote in case of a tie.

Monetary Policy objectives:

  1. It is the macroeconomic policy laid down by the central bank. It involves the management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth, and liquidity.
  2. In India, the monetary policy of the Reserve Bank of India is aimed at managing the quantity of money in order to meet the requirements of different sectors of the economy and to increase the pace of economic growth.
  3. The RBI implements the monetary policy through open market operations, bank rate policy, reserve system, credit control policy, moral persuasion, and many other instruments.