RBI’s Monetary Policy Committee Reconstituted With New Members

The central government has reconstituted the Monetary Policy Committee (MPC) under the provisions of the Reserve Bank of India (RBI) Act, 1934, the Ministry of Finance said in a statement.

• The government issued a notification on 1 October with the newly included names of the members of the MPC.
• The six-member MPC is responsible for setting policy interest rates and framing monetary policy to control inflation and support economic growth in the country.

According to the RBI Act, the MPC comprises three members from the RBI and three external members appointed by the Central Government. The newly reconstituted committee consists of the Governor of the Reserve Bank of India as the Chairperson, ex officio; the Deputy Governor of the Reserve Bank of India, in charge of monetary policy–Member, ex officio, and one officer of the Reserve Bank of India, nominated by the Central Board — Member, ex officio.

The new external members included in the MPC are Professor Ram Singh, Director, Delhi School of Economics, University of Delhi, Saugata Bhattacharya, economist; and Nagesh Kumar, Director and Chief Executive, Institute for Studies in Industrial Development. They replaced Ashima Goyal, who served as the at emeritus professor, Indira Gandhi Institute of Development Research, Shashanka Bhide, honorary senior advisor, National Council of Applied Economic Research and Jayanth R. Varma, professor at Indian Institute of Management, Ahmedabad (IIM-A).

• The MPC is entrusted with formulating India’s monetary policy, primarily through setting benchmark interest rates, to ensure price stability while maintaining economic growth. The reconstituted committee comes into effect immediately, as per the finance ministry.
  

The Monetary Policy Committee (MPC) is a key decision-making body in India responsible for determining the country’s monetary policy, particularly with respect to setting the policy interest rate. It was established to bring more transparency and accountability to the process of framing monetary policy, which was earlier solely under the Reserve Bank of India (RBI).

Key Aspects of the Monetary Policy Committee:

1. Constitution:
   • The MPC was constituted by the RBI in 2016 under the Reserve Bank of India Act, 1934, following the recommendations of the Urjit Patel Committee.
   • It consists of six members:
     • Three members from the RBI: The Governor (who acts as the Chairperson), the Deputy Governor in charge of monetary policy, and one officer of the RBI nominated by the Central Board of Directors.
     • Three external members: Appointed by the Government of India, typically experts in the fields of economics, finance, banking, or monetary policy.
2. Objectives:
   • The MPC’s main objective is to maintain price stability while keeping in mind the objective of economic growth.
   • The inflation target is set by the Government of India, which is currently pegged at 4% with a tolerance band of ±2% (i.e., inflation can fluctuate between 2% to 6%).
3. Functions:
   • The MPC meets periodically (usually every two months) to review the macroeconomic situation and set the policy repo rate, which is the interest rate at which the RBI lends to commercial banks.
   • The MPC’s primary tool is the repo rate and its decisions impact liquidity, interest rates, and inflation in the economy.
   • The committee’s decisions are based on various economic indicators such as inflation trends, GDP growth, employment, global economic conditions, etc.
4. Decision-Making Process:
   • Decisions of the MPC are taken by a majority vote. In case of a tie, the RBI Governor has the casting vote.
   • The minutes of the meetings and the individual voting patterns of MPC members are published to ensure transparency.
5. Accountability:
   • The MPC is accountable to the Government if it fails to maintain inflation within the targeted range for three consecutive quarters. In such cases, it must provide a written explanation to the government, outlining the reasons for its failure and the steps it will take to bring inflation back within the target range.

Significance of the MPC:

• Price Stability: The MPC’s mandate to focus on inflation targeting has helped India control inflation, especially after the high inflation period of 2010-2013.
• Transparency and Independence: The committee has improved the transparency of monetary policy decisions by publishing the minutes of its meetings and making voting patterns public. It also ensures greater independence in decision-making.
• Economic Growth: While inflation control remains the primary goal, the MPC also takes into account the need to support economic growth, which makes balancing both objectives crucial.

Recent Developments:

• The MPC had to navigate high inflation during 2022 and 2023 due to supply chain disruptions, food inflation, and global economic challenges, raising interest rates to bring inflation under control.