What is the MPC and how does it work?

20 Jun 2022 , 12:10 PM

The Reserve Bank of India‘s monetary policy committee is a six-member group that determines the repo rate. The repo rate is a short-term loan rate charged by the central bank to banks. It serves as a standard against which all other interest rates in the economy are measured.

Three of the six members are internal, including the governor of the Reserve Bank of India, who leads the group. The deputy governor of the Reserve Bank of India is the second internal member. One RBI officer is nominated by the central board of the RBI as the third member. The executive director in charge of monetary policy is usually the person in charge.

The other three are selected for a four-year term as external members.

According to the RBI, the policy interest rate necessary to meet the inflation objective is determined by the Monetary Policy Committee (MPC) established by the Central Government under Section 45ZB. The Monetary Policy Department (MPD) of the RBI aids the Monetary Policy Committee (MPC) in developing monetary policy.

The primary goal of monetary policy is to preserve price stability while still pursuing the goal of growth. Price stability is a critical prerequisite for long-term growth.

The Reserve Bank of India (RBI) Act, 1934 was revised in May 2016 to give a legal foundation for the flexible inflation targeting framework’s implementation.

The new RBI Act also mandates that the government of India, in collaboration with the Reserve Bank, determine the inflation goal once every five years.

As a result, the Central Government set a target of 4% Consumer Price Index (CPI) inflation for the period August 5, 2016 to March 31, 2021, with a 6% higher tolerance limit and a 2% lower tolerance limit.

The Central Government kept the inflation goal and tolerance band for the following 5-year term, from April 1, 2021 to March 31, 2026, on March 31, 2021.

The MPC must convene at least four times a year, according to the modified RBI Act. The MPC meeting requires a quorum of four members. Each member of the MPC has one vote, with the Governor having a second or casting vote in the event of a tie.

On the 14th day following the meeting, the minutes of the MPC’s proceedings are published, which contain the MPC’s resolution, each member’s vote on the resolution, and each member’s statement on the resolution adopted.

The RBI is obligated to issue a document called the Monetary Policy Report every six months to explain the drivers of inflation and the inflation prediction for the next six to eight months.