All you want to know about Monetary Policy Committee of India [MPC]

What is a Monetary Policy Committee?

A Monetary Policy Committee or MPC is a committee constituted by the government with the participation of the central bank of the country (in the case of India , RBI). The committee will be headed by the governor of the central bank (Urjit Patel).

How MPC of India came into existence?

The Government of India had amended the The Reserve Bank of India Act, 1934 (RBI Act) with the Finance Act, 2016 to facilitate the creation of Monetary Policy Committee of India.

What are objective of the new Monetary Policy Committee?

The Monetary Policy Committee is entrusted with the task of fixing the repo rates ( the benchmark rate of exchange) and also contain the inflation levels in the country through the process of Inflation targeting.

What is meaning of the term Inflation Targeting?

Inflation or the general rise in the overall level of prices of good and services, is often bad news. It erodes savings, discourages investment, stimulates capital flight, inhibits growth, makes economic planning a nightmare, and, in its extreme form, provokes social and political unrest.

inflation targeting is a technique to control this general rise in the price levels. A central bank estimates and makes public a projected, or “target,” inflation rate and then attempts to steer actual inflation toward that target, using such tools as interest rate changes. Because interest rates and inflation rates tend to move in opposite directions, the likely actions a central bank will take to raise or lower interest rates become more transparent under an inflation targeting policy. Advocates of inflation targeting think this leads to increased economic stability.

What is the Inflation Target for India?

As per the amendments, “The central government shall, in consultation with the (Reserve) Bank, determine the inflation target in terms of the Consumer Price Index, once in every five years. The central government shall, upon such determination, notify the inflation target in the official gazette.”

Government notified 4 per cent inflation target with a range of plus/minus 2 per cent for the next five years ( 2016-2021) under the monetary policy framework agreement with the Reserve Bank.

How is the  Monetary Policy committee [MPC] of India is constituted?

As per the provisions of the RBI Act, the MPC will be comprised of 6 members.Out of the six Members, three Members will be from the RBI and the other three Members of MPC will be appointed by the Central Government. The Central Government has accordingly constituted the Monetary Policy Committee of RBI, with the following composition, namely:-

1. The Governor of the Bank—Chairperson, ex officio;
2. Deputy Governor of the Bank, in charge of Monetary Policy—Member, ex officio;
3. One officer of the Bank to be nominated by the Central Board—Member, ex officio;
4. Shri Chetan Ghate, Professor, Indian Statistical Institute (ISI) —Member
5. Professor Pami Dua, Director, Delhi School of Economics (DSE) — Member        
6. Dr. Ravindra H. Dholakia, Professor, Indian Institute of Management (IIM),  Ahmedabad—Member

The Members of the Monetary Policy Committee appointed by the Central Government shall hold office for a period of four years

How does the Monetary Policy Committee work?

Out of the Six members, who constitute the MPC, each member will have one vote.The voice of the majority will prevail in fixing the final interest rate and the decision will be binding on the RBI. In the event of draw in the voting , RBI governor will have casting vote to remove the deadlock ( mmmh still there is a room for controversies)

How working of MPC is different from old system?

In the old system, a technical advisory committee constituted by the RBI, which consists central bank’s top brass including the deputy governor and the governor and external advisors, give their opinion and suggestions on what the RBI should do. But the governor’s word is final on the rates and the advice of the technical advisors is not binding on the RBI.

Has any other country got a Monetary Policy Committees in place?

Notable among countries which have adopted inflation targeting as a monetary policy objective are New Zealand, England, Canada, South Africa, Sweden, among others. Research has found that inflation, in general, had come down to a much acceptable level in many countries after adopting inflation target than before.

Conclusion

What happens to interest rates in the country matters to you as a saver, investor, consumer and borrower. High rates can help savers earn more on debt options. Loan-takers may prefer lower rates. The MPC will ensure that decisions on interest rates are made through debate by a panel of experts.