The Monetary Policy Committee of India is a committee of the Reserve Bank of India that 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 and it publishes its decisions after each such meeting.
Monetary policy decisions by central banks can have far-reaching implications for the economy, investors, savers and borrowers. And if seen to be taken by an individual, these decisions can cause a lot of heartburn. Therefore, globally many governments have solved this problem by appointing a committee.
On June 27, 2016, the Government amended the RBI Act to hand over the job of monetary policy-making in India to a newly constituted Monetary Policy Committee (MPC).
The committee comprises of six members - three officials of the Reserve Bank of India (the Governor, a Deputy Governor and another official ) and three external members nominated by the Government of India. A search committee will recommend three external members, experts in the field of economics, banking or finance, for the Government appointees. 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 March 31, 2021 with an upper tolerance of 6% and a lower tolerance of 2%.
he committee was created in 2016 to bring transparency and accountability in fixing India's Monetary Policy. Minutes are published after every meeting with each member explaining his/her opinions. The committee is answerable to the Government of India if the inflation exceeds the range prescribed for three consecutive months.
Why is it important?
Until recently, India’s central bank used to take its monetary policy decisions based on the multiple indicator approach. Its rate decisions were expected to take into account inflation, growth, employment, banking stability and the need for a stable exchange rate.
As we can see, this is a tall order. Thus, RBI (with the Governor as the focal point) would be subject to hectic lobbying ahead of each policy review and trenchant criticism after it. The Government would clamour for lower rates while consumers bemoaned high inflation. Bank chiefs would want rate cuts, but pensioners would want high rates. RBI ended up juggling all these objectives and focusing on different indicators at different points in time.
To resolve this, RBI set up an Expert Committee under Urijit Patel to revise the monetary policy framework, and it came up with its report in January 2014. It suggested that RBI abandon the ‘multiple indicator’ approach and make inflation targeting the primary objective of its monetary policy. It also mooted having an MPC so that these decisions could be made through majority vote. Having both Government and RBI members on the MPC was suggested for accountability. The Government would have to keep its deficit under check and RBI would owe an explanation for runaway inflation.
Composition:
The composition of the current and first monetary policy committee is as follows:
- Governor of the Reserve Bank of India – Chairperson, ex officio - Urjit Patel
- Deputy Governor of the Bank, in charge of Monetary Policy—Member, ex officio - Viral A Acharya
- One officer of the Reserve Bank of India to be nominated by the Central Board – Member, ex officio; - Michael Patra
- Shri Chetan Ghate, Professor, Indian Statistical Institute (ISI) – Member;
- Professor Pami Dua, Director, Delhi School of Economics – Member;
- Dr. Ravindra H. Dholakia, Professor, Indian Institute of Management, Ahmedabad - Member
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