Major Monetary Policy reforms introduced in recent times

In order to effectively handle monetary policy, we’ve set up the Monetary Policy Committee (MPC), a structured body established under the Reserve Bank of India Act, 1934. This framework is designed to maintain stable prices while also considering the goal of fostering growth. The Central Government has appointed a 6-member MPC as outlined in Section 45ZB of the amended RBI Act, 1934.

Their inaugural meeting took place in Mumbai on October 3, 2016. The committee, led by the Governor of RBI as the ex-officio Chairman, is tasked with determining the policy interest rate (repo rate) necessary to achieve the inflation target of 4%. This initiative stems from a recommendation by an RBI-appointed committee, headed by then deputy governor Urjit Patel in 2014, advocating for the formation of the Monetary Policy Committee.

Functions

The MPC, or Monetary Policy Committee, has the important task of determining various policy rates. These rates include the Marginal Standing Facility (MSF), Repo Rate, Reverse Repo Rate, and Liquidity Adjustment Facility.

Composition of MPC

There will be a committee with a total of six members.
Out of these six members, the government will choose three.
It’s important to note that none of the government officials will be selected for the committee.
The remaining three members will come from the Reserve Bank of India (RBI).
The governor of the RBI will automatically serve as the chairperson of the committee.
Another member from the RBI will be the Deputy Governor responsible for monetary policy.
Additionally, an executive director from the central bank will also be a part of the committee.

Selection

To choose government nominees for the Monetary Policy Committee (MPC), a Search-cum-Selection Committee will be formed.
The committee will be led by the Cabinet Secretary, alongside the RBI Governor and the Secretary of Economic Affairs.
Additionally, three experts in the areas of economics, banking, finance, or monetary policy will be part of this committee.
Together, they will collaborate to identify and nominate individuals to serve on the MPC, contributing their expertise to crucial economic decision-making.

Term

Members of the MPC will be appointed for a period of four years and shall not be eligible for reappointment.

RBI governor’s role

The committee will be led by the RBI Governor.
It’s important to note that the governor won’t have the authority to overrule other panel members.
However, in the event of a tie, the governor will have a casting vote.

Monetary Policy Objectives

It is the macroeconomic policy laid down by the central bank.
It involves the management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth, and liquidity.
In India, the monetary policy of the Reserve Bank of India is aimed at managing the quantity of money in order to meet the requirements of different sectors of the economy and to increase the pace of economic growth.
The RBI implements the monetary policy through open market operations, bank rate policy, reserve system, credit control policy, moral persuasion, and many other instruments.