Q. Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC)?

  1. It decides the RBI’s benchmark interest rates,
  2. It is a 12-member body including the Governor of RBI and is reconstituted every year.
  3. It functions under the chairmanship of the Union Finance Minister.

Select the correct answer using the code given below: 

  • 1 only
  • 1 and 2 only
  • 3 only
  • 2 and 3 only

Answer: (a) 1 only

Monetary Policy Committee (MPC):
  • The Monetary Policy Committee (MPC) is a committee constituted by the Central Government and led by the Governor of RBI.
  • Monetary Policy Committee was formed with the mission of fixing the benchmark policy interest rate (repo rate) to restrain inflation within the particular target level. The RBI governor controls the monetary policy decisions with the support and advice of the internal team and the technical advisory committee.
    • Initially, the main decisions related to interest rates were taken by the Governor of RBI alone before the establishment of the committee.
    • MPC was constituted under the Reserve Bank of India Act, 1934 as an initiative to bring more transparency and accountability in fixing the Monetary Policy of India. 
  • The Reserve Bank of India Act, 1934 (RBI Act) has been amended by the Finance Act, 2016  to provide for a statutory and institutionalized framework for a MPC.
    • Under Section 45ZB of the amended RBI Act, 1934, the central government is empowered to constitute a six-member MPC.
    • The amended RBI Act, 1934 also provides for the inflation target (4% +-2%) to be set by the Government of India, in consultation with the Reserve Bank, once in every five years.
  • Composition:
    • 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.
    • The external members hold office for a period of four years.
  • 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 a majority vote. In case of a tie, the RBI governor will have the second or casting vote.
  • The decision of the MPC would be binding on the RBI.
  • MPC conducts meetings at least 4 times a year and the monetary policy is published after every meeting with each member explaining his opinions. 

Objectives of Monetary Policy:

  • To stabilize the business cycle.
  • To provide reasonable price stability.
  • To provide faster economic growth.
  • Exchange Rate Stability.
Instruments of Monetary Policy
  • There are both direct and indirect instruments used for implementing monetary policy. Few include:
    • Repo rate 
    • Reverse Repo rate
    • Liquidity Adjustment Facility (LAF)
    • Marginal Standing Facility (MSF)
    • Corridor
    • Bank Rate
    • Cash Reserve Ratio (CRR)
    • Statutory Liquidity Ratio (SLR)
    • Open Market Operations (OMOs)
    • Market Stabilisation Scheme (MSS)