The Monetary Policy Committee is responsible for fixing the benchmark interest rate in India. The meetings of the Monetary Policy Committee are held at least 4 times a year and it publishes its decisions after each such meeting. The committee comprises six members - three officials of the Reserve Bank of India and three external members nominated by the Government of India. They need to observe a "silent period" seven days before and after the rate decision for "utmost confidentiality". The Governor of Reserve Bank of India is the chairperson ex officio of the committee. Decisions are taken by majority with the Governor having the casting vote in case of a tie. The current mandate of the committee is to maintain 4% annual inflation until 31 March 2021 with an upper tolerance of 6% and a lower tolerance of 2%. The Reserve Bank of India Act, 1934 was amended by Finance Act, 2016 to constitute MPC which will bring more transparency and accountability in fixing India's Monetary Policy. The monetary policy are published after every meeting with each member explaining his opinions. The committee is answerable to the Government of India if the inflation exceeds the range prescribed for three consecutive quarters.
Establishment and purpose
Key decisions pertaining to benchmark interest rates used to be taken by the Governor of Reserve Bank of India alone prior to the establishment of the committee. The Governor of RBI is appointed and can be disqualified by the Government anytime. This led to uncertainty and resulted in friction between the Government and the RBI, especially during the times of low growth and high inflation. Before the constitution of the MPC, a Technical Advisory Committee on monetary policy with experts from monetary economics, central banking, financial markets and public finance advised the Reserve Bank on the stance of monetary policy. However, its role was only advisory in nature. The setting up of a committee to decide on Monetary Policy was first proposed by the Urjit Patel Committee. The Committee suggested a five-member MPC - three members from the RBI and two nominated by the Government. The Government initially proposed a seven-member committee - three from the RBI and four nominated by it. Subsequent negotiations led to the current composition of the committee, with the external members having a four-year term. The Reserve Bank’s Monetary Policy Department assists the MPC in formulating the monetary policy. Views of key stakeholders in the economy, and analytical work of the Reserve Bank contribute to the process for arriving at the decision on the policy repo rate. The Financial Markets Operations Department operationalises the monetary policy, mainly through day-to-day liquidity management operations. The Financial Markets Committee meets daily to review the liquidity conditions so as to ensure that the operating target of monetary policy is kept close to the policy repo rate. Monetary Policy Committee came into force on 27 June 2016. Suggestions for setting up a Monetary policy committee is not new and goes back to 2002 when YV Reddy committee proposed to establish a MPC, then Tarapore committee in 2006, Percy Mistry committee in 2007, Raghuram Rajan committee in 2009 and then Urjit Patel Committee in 2013.
Members referred to at 4 to 6 above, will hold office for a period of four years from the date of appointment while the other three members are official. All the central government nominees are not eligible to be re-appointed.
