• 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.
  • Monetary Policy Committee is defined in Section 2(iii)(cci) of the Reserve Bank of India Act, 1934 and is constituted under Sub-section (1) of Section 45ZB of the same Act.
  • The MPC replaces the current system where the RBI governor, with the aid and advice of his internal team and a technical advisory committee, has complete control over monetary policy decisions.
  • A Committee-based approach will add lot of value and transparency to monetary policy decisions.
  • 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.
  • The Reserve Bank of India and Government of India signed the Monetary Policy Framework Agreement on 20 February 2015.
  • The history of suggestions for setting up a MPC is not new and traces back to 2002 when the Y. V. Reddy Committee recommended for a MPC to decide policy actions.
  • Subsequently, suggestions were made to set up a MPC in 2006 by the Tarapore Committee, in 2007 by the Percy Mistry Committee, in 2009 by the Raghuram Rajan Committee and then in 2013, both in the report of the Financial Sector Legislative Reforms Commission (FSLRC) and the Dr. Urjit R. Patel (URP) Committee.
  • According to the URP Committee, “Heightened public interest and scrutiny of monetary policy decisions and outcomes has propelled a worldwide movement towards a committee based approach to decision making with a view to bringing in greater transparency and accountability in India.”
  • Under the Monetary Policy Framework Agreement, the RBI will be responsible for containing inflation targets at 4% (with a standard deviation of 2%) in the medium term (For more details see here). 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.
  • This target would be notified in the Official Gazette.
  • Though the central bank already had a monetary framework and was implementing the monetary policy, the newly designed statutory framework would mean that the RBI would have to give an explanation in the form of a report to the Central Government, if it failed to reach the specified inflation targets.
  • It shall, in the report, give reasons for failure, remedial actions as well as estimated time within which the inflation target shall be achieved. (The factors that constitute failure shall be such as may be notified by the Central Government in the Official Gazette.)
  • Further, RBI is mandated to publish a Monetary Policy Report every six months, explaining the sources of inflation and the forecasts of inflation for the coming period of six to eighteen months.
  • Given this backdrop, MPC decides the changes to be made to the policy rate (repo rate) so as to contain the inflation within the target level specified to it by the Central Government.
  • Each Member of the Monetary Policy Committee has to write a statement specifying the reasons for voting in favour of, or against the proposed resolution, and the same alongwith the resolution adopted by the MPC is published as minutes of the meeting by RBI after 14 days of the said meeting.
  • In addition, subsequent to the MPC meeting, RBI has to publish a document explaining the steps to be taken by it to implement the decisions of the Monetary Policy Committee, including any changes thereto.

 Tell us more about the Constitution of the MPC

  • The Central Government constitutes the MPC through a notification in the Official Gazette. Altogether, the MPC will have six members, – the RBI Governor (Chairperson), the RBI Deputy Governor in charge of monetary policy, one official nominated by the RBI Board and the remaining three members would represent the Government of India.
  • These Government of India nominees are appointed by the Central Government based on the recommendations of a 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.
  • The three central government nominees of the MPC appointed by the search cum selection committee will hold office for a period of four years and will not be eligible for re-appointment.
  • These three central government nominees in MPC are mandated to be persons of ability, integrity and standing, having knowledge and experience in the field of economics or banking or finance or monetary policy.
  • RBI Act prohibits appointing any Member of Parliament or Legislature or public servant, or any employee / Board / committee member of RBI or anyone with a conflict of interest with RBI or anybody above the age of 70 to the MPC.
  • Further, central government also retains powers to remove any of its nominated members from MPC subject to certain conditions and if the situation warrants the same.

What about the Decision Making at 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 second or casting vote.
  • The decision of the Committee would be binding on the RBI.

No act or proceeding of the Monetary Policy Committee shall be invalid merely by reason of:

  • any vacancy in, or any defect in the constitution of the MPC; or
  • any defect in the appointment of a person acting as a Member of the MPC; or
  • any irregularity in the procedure of the MPC not affecting the merits of the case.
  • As per the Act, RBI has to organise at least four meetings of the MPC in a year. (More meetings can be held if the RBI Governor is of that opinion)
  • The government may, if it considers necessary, convey its views, in writing, to the MPC from time to time.
  • RBI is mandated to furnish necessary information to the MPC to facilitate their decision making and if any Member of the MPC, at any time, requests the RBI for additional information, including any data, models or analysis, the same have to be provided, not just to that member but to all members.