Monetary policy Committee of RBI and its functions
- Central bank’s accommodative policy stance carries the risk of falling behind the curve in future with it
- Because it limits the MPC’s freedom of action in ensuing meetings
- The MPC fixes the benchmark interest rate or the base or reference rate that is used to set other interest rates in India.
- An accommodative stance indicates a willingness on the part of the central bank to expand money supply and cut interest rates.
Monetary policy
- The primary objective of the RBI’s monetary policy is to maintain price stability while keeping in mind the objective of growth.
- Price stability is a necessary precondition to sustainable growth.
- The RBI Act was amended in 2016 to provide a legislative mandate to the central bank to operate the country’s monetary policy framework.
- The framework aims at setting the policy (repo) rate based on an assessment of the current and evolving macroeconomic situation; and modulation of liquidity conditions to anchor money market rates at or around the repo rate.
- Repo rate changes transmit through the money market to the entire financial system
- It influences aggregate demand which is a key determinant of inflation and growth.
Monetary Policy Committee (MPC)
- The central government is empowered to constitute a six-member Monetary Policy Committee (MPC) under Section 45ZB of the amended RBI Act, 1934
- Its objective is to determine the policy interest rate required to achieve the inflation target.
- The first such MPC was constituted on September 29, 2016.
- The decision of the Monetary Policy Committee is binding on the Bank
Members of MPC
- As per Section 45ZB,MPC consists of the 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