Monetary Policy Committee (MPC) Composition Flashcards
What is the Monetary Policy Committee (MPC)?
The MPC is a committee established under the amended Reserve Bank of India Act in 2016. It is responsible for setting India’s benchmark interest rate, known as the repo rate.
How many members are on the MPC and how are they selected?
The MPC has six members. Three are from the RBI and three are from the Government of India. RBI members are the Governor (chairperson), the Deputy Governor in charge of monetary policy, and an RBI Central Board nominee. The GoI members are nominated by a Search-cum-Selection Committee.
What is the decision-making process of the MPC?
The MPC decides on monetary policy by majority vote. In the case of a tie, the RBI Governor has the deciding vote.
How often does the MPC meet, and what are its reporting requirements?
The MPC meets at least four times a year but often meets every two months to update monetary policy. It publishes meeting minutes within 14 days and a Monetary Policy Report every six months.
What is the role of the Government of India in relation to the MPC?
The Government of India can only communicate with the MPC in writing. This helps maintain the RBI’s autonomy in setting monetary policy.
What is the primary goal of the Monetary Policy Committee?
The MPC’s primary goal is to maintain price stability while keeping in mind the objective of growth. This means targeting a specific inflation rate (currently 4% with a +/- 2% tolerance band).
What is the repo rate?
The repo rate is the interest rate at which the RBI lends money to commercial banks. It is the MPC’s primary tool for influencing the overall cost of borrowing in the economy.
How does changing the repo rate impact the economy?
Increasing the repo rate: Makes borrowing more expensive for banks, which can lead to higher interest rates for consumers and businesses. This helps to slow down economic activity and reduce inflation.
Decreasing the repo rate: Makes borrowing cheaper, potentially stimulating economic activity and putting upward pressure on inflation.
Besides the repo rate, what other tools does the MPC use to manage monetary policy?
Reverse Repo Rate: The interest rate at which banks can park excess funds with the RBI.
Cash Reserve Ratio (CRR): The percentage of deposits that banks must keep with the RBI.
Statutory Liquidity Ratio (SLR): The percentage of deposits that banks must invest in government securities.
Open Market Operations (OMO): Buying or selling government securities to influence liquidity in the market.
What does it mean for the MPC to have a “flexible inflation targeting framework”?
It means the MPC focuses on achieving a specific inflation target (4% +/- 2%), but it also considers economic growth. This flexibility allows for adjustments in policy as needed to support economic activity.
What is the role of the Union Government and the RBI in setting India’s inflation target?
The Union Government sets the inflation target after consulting with the RBI Governor. This ensures collaboration between the government and the central bank in managing price stability.
What is the current inflation target range in India, and what is the central target?
The current inflation target range is 2% to 6% for the Consumer Price Index (CPI: All India). The central target within this range is 4%.
How long is the current inflation target valid?
The current inflation target was originally set for 2016-2021. It has been extended and is now valid until March 31st, 2026.
What happens if the Monetary Policy Committee (MPC) fails to keep inflation within the target range?
If inflation stays outside the 2-6% range for three consecutive quarters, the MPC must submit a report to the government. This report must explain the reasons for the failure and outline proposed remedial actions to bring inflation back within the target range.
What is the current situation regarding inflation targeting in India?
Inflation in India has moderated in recent months (2023). However, the MPC has had to submit a report to the government explaining why inflation was above the 6% upper limit of the target range for three consecutive quarters in 2022. The factors contributing to the high inflation and the MPC’s response will likely continue to be a focus in 2023.
