Monetary Policy Committee


On June 27, 2016, the Government amended the RBI Act to hand over the job of monetary policy-making in India to a newly constituted Monetary Policy Committee (MPC)on the basis of Urjit Patel Committee Report 2014.

TheMPC is to be a six-member panel that is expected to bring “value and transparency” to rate-setting decisions. It will feature three members from the RBI — the Governor, a Deputy Governor and another official — and three independent members to be selected by the Government.

A search committee will recommend three external members, experts in the field of economics, banking or finance, for the Government appointees. The MPC will meet four times a year to decide on monetary policy by a majority vote. And if there’s a tie between the ‘Ayes’ and the ‘Nays’, the RBI governor gets the deciding vote.

Its importantance

Monetary policy decisions by central banks can have far-reaching implications for the economy, investors, savers and borrowers. And if seen to be taken by an individual, these decisions can cause a lot of heartburn. Therefore, globally many governments have solved this problem by appointing a committee.

Until recently, India’s central bank used to take its monetary policy decisions based on the multiple indicator approach. Its rate decisions were expected to take into account inflation, growth, employment, banking stability and the need for a stable exchange rate.

What happens to interest rates in the country matters to  a saver, investor, consumer and borrower. High rates can help savers earn more on debt options. Loan-takers may prefer lower retes. The MPC will ensure that decisions on interest rates are made through debate by a panel of experts. The many-heads-are-better-than-one approach may also help ensure that the decision isn’t easily influenced by bias or lobbying.

India’s shift to an MPC, driven by a clear inflation-targeting framework, if it succeeds, may also ensure that consumers and investors can look forward to lower inflation rates over the long-term. The public disclosure of MPC deliberations will also tell you why its members batted for higher or lower rates.

Monday, 11th Jun 2018, 07:54:44 AM

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