Role of Monetary Policy Committee (MPC) on inflation target

Monetary policy decisions by central banks can have far-reaching implications for the economy, investors, small depositors and borrowers. Till the formation of MPC,   RBI used to take monetary policy decision on Repo interest rates based on multiple indicator approach. The Governor of RBI being the focal point was subjected to hectic lobbying ahead of each policy review and severe criticism after it. Normally, the Government would clamour for lower rates while consumers lamented high inflation. Borrowers and Bank chiefs would want rate cuts, but pensioners, small depositors would want high rates. Under such circumstances, RBI has been juggling up with all these objectives and focusing on different indicators while deciding key policy rates at different points in time. In view of the above, the expert committee headed by Dr. Urjit Patel (2014) recommended for revising the monetary policy framework. The committee suggested that RBI should abandon the ‘multiple indicator approach’ and make inflation targeting the primary objective of its monetary policy. The committee also suggested for formation of MPC so that rate setting decisions could be made through majority vote. This is in view of many-heads-are-better-than-one approach in decision making on key policy rates which cannot be easily influenced by bias or lobbying and also expected to bring “value and transparency” to rate-setting decisions..

On June 27, 2016, the Government amended the RBI Act to hand over the job of monetary policy-making in India to a newly constituted Monetary Policy Committee (MPC).  Accordingly, the Central Government in September 2016 constituted the MPC under amended RBI Act Section 45ZB which determines the policy interest rate required to achieve the inflation target. The members of MPC are as under:

1. Governor of the Reserve Bank of India – Chairperson, ex officio
2. Deputy Governor of the Reserve Bank of India, in charge of    Monetary Policy – Member, ex officio;
3. One officer of the Reserve Bank of India to be nominated by the Central Board – Member, ex officio;
4. Shri Chetan Ghate, Professor, Indian Statistical Institute (ISI) – Member;
5. Professor Pami Dua, Director, Delhi School of Economics – Member;
6. Dr. Ravindra H. Dholakia, Professor, Indian Institute of Management, Ahmedabad – Member.

(Members mentioned at 4 to 6 are Government appointees, experts in the field of economics, banking or finance, chosen and recommended by a search committee (separate committee). These independent members will hold office for a period of four years or until further orders, whichever is earlier.)

The MPC is required to meet at least four times in a year. The quorum for the meeting of the MPC is four members.Each member of the MPC has one vote, and in the event of an equality of votes, the Governor has a second or casting vote.The resolution adopted by the MPC is published after conclusion of every meeting of the MPC in accordance with the provisions of Chapter III F of the Reserve Bank of India Act, 1934. On the 14th day, the minutes of the proceedings of the MPC are published which include:
a. the resolution adopted by the MPC;
b. the vote of each member on the resolution, ascribed to such member; and
c. the statement of each member on the resolution adopted.
The first meeting of the constituted MPC was held on October 3 and 4, 2016 in the run up to the Fourth Bi-monthly Monetary Policy Statement, 2016-17.

The Reserve Bank’s Monetary Policy Department (MPD) 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.