MPC (Monetary Policy Committee): Structure and Functions

26/01/2021 1 By indiafreenotes

The term ‘Monetary Policy’ is the Reserve Bank of India’s policy pertaining to the deployment of monetary resources under its control for the purpose of achieving GDP growth and lowering the inflation rate. The Reserve Bank of India Act 1934 empowers the RBI to make the monetary policy. We can say that the monetary policy stands for the control measures adopted by the Central Bank of a nation.

The Monetary Policy Committee is responsible for fixing the benchmark interest rate in India. The meetings of the Monetary Policy Committee are held at least 4 times a year (specifically, at least once every quarter) and it publishes its decisions after each such meeting.

Monetary Policy Committee (MPC) has been instituted by the Central Government of India under Section 45ZB of the RBI Act that was amended in 1934. MPC had its first meeting for two days on October 3 and October 4, 2016. The MPC is entrusted with the responsibility of deciding the different policy rates including MSF, Repo Rate, Reverse Repo Rate, and Liquidity Adjustment Facility. Monetary Policy Committee (MPC) has six members and the main objective of this body is to maintain the price stability and boosting up the growth rate of the country’s economy.

The committee comprises six members, three officials of the Reserve Bank of India and three external members nominated by the Government of India. They need to observe a “silent period” seven days before and after the rate decision for “utmost confidentiality”. The Governor of Reserve Bank of India is the chairperson ex officio of the committee. Decisions are taken by majority with the Governor having the casting vote in case of a tie. The current mandate of the committee is to maintain 4% annual inflation until 31 March 2021 with an upper tolerance of 6% and a lower tolerance of 2%.

The Reserve Bank of India Act, 1934 was amended by Finance Act (India), 2016 to constitute MPC which will bring more transparency and accountability in fixing India’s Monetary Policy. The monetary policy are published after every meeting with each member explaining his opinions. The committee is answerable to the Government of India if the inflation exceeds the range prescribed for three consecutive quarters.

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. Deputy governor of RBI in charge of the monetary policy will be a member, as also an executive director of the central bank.

Objectives of the Monetary Policy:

The Chakravarty committee has emphasized that price stability, economic growth, equity, social justice, promoting and nurturing the new monetary and financial institutions have been important objectives of the monetary policy in India.

RBI tries always tries to reduce rate of inflation or keep it within a sustainable limit while on the other hand government of India focus to accelerate the GDP growth of the country.

Monetary Policy objectives

As per the suggestions made by Chakravarty Committee, aspects such as price stability, economic growth, equity, social justice, and encouraging the growth of new financial enterprises are some crucial roles connected to the monetary policy of India.

  • While the Government of India tries to accelerate the GDP growth rate of India, the RBI keeps trying to bring down the rate of inflation within a sustainable limit.
  • In order to achieve its main objectives, the Monetary Policy Committee determines the ideal policy interest rate that will help achieve the inflation target in front of the country.