NEWS: The Monetary Policy Committee (MPC) is the body responsible for formulating monetary policy in IndiaàIt was established under the amended Reserve Bank of India Act, 1934.
Background
- Introduced through RBI Act amendment in 2016.
- Based on recommendations of: Urjit Patel Committee Legal Provision:
Under Section 45ZB: Central Government constitutes MPC.
- This marked a shift from: Governor-centric decisions → Committee based decision making
Objective of MPC
- Control inflation (price stability)
- As per lawà MPC determines Policy Rate (Repo Rate) to achieve inflation target
- Inflation Targetà Set by Government (currently ~4% ± 2%)
Composition of MPC à MPC has 6 members:
From RBI (3 members)
- RBI Governor → Chairperson
- Deputy Governor (Monetary Policy)
- One RBI official nominated by Central Board
From Government (3 members)
- Appointed by Central Government
- Experts in: Economics, Banking, Finance
Decision-Making Process
- Each member has one vote
- Decisions taken by majority (4 out of 6)
- In case of tie: RBI Governor has casting vote
Monetary Policy Instruments
These are tools used by RBI to control liquidity and inflation:
Policy Rates
- Repo Rateà Rate at which RBI lends to banks Main tool to control inflation
- Reverse Repo Rateà Rate at which RBI borrows from banks
- Standing Deposit Facility (SDF)àAllows RBI to absorb liquidity without collateral
- Marginal Standing Facility (MSF)à Emergency borrowing by banks from RBI
- Bank Rateà Long-term lending rate of RBI
Liquidity Management Tools
- Liquidity Adjustment Facility (LAF)à Daily liquidity management through repo/reverse repo
- LAF Corridorà Range between MSF and SDF rates
- Fine-Tuning Operationsà Short-term liquidity adjustments
Reserve Ratios
- Cash Reserve Ratio (CRR)à % of deposits banks keep with RBI
- Statutory Liquidity Ratio (SLR)à % of deposits banks maintain in liquid assets
- Open Market Operations (OMOs)à RBI buys/sells government securities, Controls money supply