Economy / Monetary and Credit Policy / Monetary Policy Committee (MPC).
Monetary Policy Committee (MPC).
The Monetary Policy Committee (MPC) plays a critical role in shaping India's monetary policy. Established in 2016 through an amendment to the Reserve Bank of India (RBI) Act, the MPC is tasked with making key decisions related to monetary policy.
Key Features of MPC:
- Formation and Composition:
- The MPC is a six-member body headed by the Governor of the RBI. Other members include the Deputy Governor in charge of monetary policy, one official nominated by the RBI Board, and three independent members appointed by the Government.
- The independent members are chosen by a search-cum-selection committee and serve a four-year term, with no eligibility for reappointment. Members of Parliament, Legislature, or public servants cannot be appointed to the MPC.
- Decision-Making Process:
- The MPC replaced the previous system where the RBI Governor, with the aid and advice of a technical advisory committee, had complete control over monetary policy decisions.
- All decisions are made through a majority vote, and in case of a tie, the RBI Governor has the casting vote.
- Objective and Responsibilities:
- The primary objective of the MPC, as stated in the amended RBI Act, is to maintain price stability while considering the objective of growth in the context of an increasingly complex economy.
- The MPC is responsible for deciding the policy rate, specifically the Repo rate, to contain inflation within the target level set by the Central Government.
- Transparency and Accountability:
- The MPC enhances transparency and accountability in the monetary policy formulation process. Minutes of the MPC meetings are published by the RBI after 14 days.
- The RBI also publishes a document explaining the steps it plans to take to implement the decisions of the MPC.
- Advantages of Committee-Based Formulation:
- Collective Wisdom: A committee can represent different viewpoints, and studies indicate that collective wisdom is often superior to individual decision-making.
- Reduced Pressure: Spreading responsibility across committee members can help reduce internal and external pressure on an individual.
- Continuity: A committee ensures continuity in monetary policy formulation, even with changes in individual members.
- Institutionalization: The committee-based approach institutionalizes the process of monetary policy formulation, aligning with the RBI's clear inflation target mandated by statute.
The MPC has become a pivotal institution in shaping India's monetary policy, contributing to a more structured, transparent, and accountable decision-making process.
