Bharat SainiLast Updated on February 25, 2017 by Bharat Saini
Monetary Policy Committee (MPC) has been set up, consequent to the the Monetary Policy Framework Agreement signed on 20 February 2015 between Government of India and Reserve Bank of India (RBI), the country’s Central Bank, to task RBI with the responsibility for price stability and inflation targeting. This MPC replaces the system where the RBI governor, with the aid and advice of his internal team and a technical advisory committee, had complete control over monetary policy decisions. A Committee-based approach will add lot of value and transparency to monetary policy decisions.
As announced by the Finance Minister in his Budget Speech for 2016-17, the Government, under the Finance Act, 2016, has amended the Reserve Bank of India Act, 1934 (RBI Act), to provide for a statutory and institutionalised framework for a Monetary Policy Committee (MPC). Now there is a statutory basis for a Monetary Policy Framework and the MPC. As per the amendment, the primary objective of the monetary policy is to maintain price stability, while keeping in mind the objective of growth, and to meet the challenge of an increasingly complex economy. RBI would, accordingly, operate a Monetary Policy Framework. Out of the six Members of MPC, three Members will be from the Reserve Bank of India (RBI), including the Governor, RBI, who will be the ex-officio Chairperson, the Deputy Governor, RBI and one officer of RBI. The other three Members of MPC will be appointed by the Central Government, on the recommendations of a Search-cum Selection Committee. These three Members of MPC will be experts in the field of economics or banking or finance or monetary policy and will be appointed for a period of 4 years and shall not be eligible for re-appointment. Three members appointed by the Government to the MPC are Chetan Ghate, Professor, Indian Statistical Institute; Pami Dua, Director of the Delhi School of Economics, and Ravindra H Dholakia, Professor, IIM, Ahmedabad.
The MPC has been entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level. Under sub-section (1) of section 45ZA of the RBI Act, the Central Government, in consultation with the RBI, determines the inflation target in terms of the Consumer Price Index (CPI), once in every five years. The inflation target for the period beginning August 5, 2016, the date of publication of the Gazette Notification and ending on the March 31, 2021, has been fixed at 4% with an upper limit of 6% and a lower limit of 2%.
The Monetary Policy Committee (MPC) at its first policy review lowered the repo rate, at which it lends to banks, by 25 basis points to 6.25% and maintained that it would continue with an accommodative monetary stance. All other rates moved in tandem. A basis point is 0.01%. The Reserve Bank of India’s key policy interest rate has now been cut to its lowest level since 2011.
Governor Urjit Patel, who briefed the media for the first time since his elevation, gave no hint of what the committee’s future stance on interest rates could be. However, his colleague on the MPC and RBI Executive Director M.D. Patra hinted there was scope for policy interest rates to ease further when he said the neutral rate is 1.25 per cent, which is lower than the 1.5-2 per cent regime that prevailed under the previous governor Raghuram Rajan.
The neutral rate is the difference between the risk free rate and inflation — a key determinant of the policy rate.
