Monetary Policy Committee (MPC)

About:

• Under the “inflation-targeting” regime that began in 2016, the central bank is required to target an inflation rate of 4 per cent, with a leeway of 2 percentage points on either side.
• Retail inflation which is calculated using the Consumer Price Index (CPI) has been outside the RBI’s comfort zone for three consecutive quarters beginning January.
• Under the RBI Act, 1934, if the central bank fails to meet the inflation target for three consecutive quarters, it is required to provide the following information to the government:
• reasons for the failure to achieve the inflation target;
• remedial actions proposed to be taken; and
• an estimate of the time period within which the inflation target shall be achieved pursuant to timely implementation of the proposed remedial actions.

About MPC

• Under Section 45ZB of the amended RBI Act, 1934, the central government is empowered to constitute a six-member MPC to determine the policy interest rate required to achieve the inflation target. The first such MPC was constituted on September 29, 2016.
• Functions: MPC shall determine the Policy Rate required to achieve the inflation target”, and that “the decision of the Monetary Policy Committee shall be binding on the Bank”.
• Members:
  • RBI Governor as its ex officio chairperson, the Deputy Governor in charge of monetary policy, an officer of the Bank to be nominated by the Central Board, and three persons to be appointed by the central government.
  • The last category of appointments must be from “persons of ability, integrity and standing, having knowledge and experience in the field of economics or banking or finance or monetary policy”.