MONETARY POLICY COMMITTEE

The Monetary Policy Committee (MPC)

An important landmark in India’s monetary history is the constitution of an empowered six-member Monetary Policy Committee (MPC) in September, 2016 consisting of the RBI Governor (Chairperson), the RBI Deputy Governor in charge of monetary policy, one official nominated by the RBI Board and the remaining three central government nominees representing the Government of India who are persons of ability, integrity and standing, having knowledge and experience in the field of Economics or banking or finance or monetary policy.

The MPC shall determine the policy rate required to achieve the inflation target. Accordingly, fixing of the benchmark policy interest rate (repo rate) is made through debate and majority vote by this panel of experts. With the introduction of the Monetary Policy Committee, the RBI will follow a system which is more consultative and participative similar to the one followed by many of the central banks in the world. The new system is intended to incorporate:

• diversity of views,
• specialized experience,
• independence of opinion ,
• representativeness , and
•  accountability.

The Reserve Bank’s Monetary Policy Department (MPD) assists the MPC in formulating the monetary policy. The 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 (FMOD) operationalises the monetary policy, mainly through day-to-day liquidity management operations. The Financial Markets Committee (FMC) meets daily to review the liquidity conditions so as to ensure that the operating target of monetary policy (weighted average lending rate) is kept close to the policy repo rate.

Before the constitution of the MPC, a Technical Advisory Committee (TAC) on monetary policy with experts from Monetary Economics, Central Banking, Financial Markets and Public Finance advised the RBI on the standpoint of monetary policy. However, its role was only advisory in nature. With the formation of MPC, the TAC on Monetary Policy ceased to exist.

CONCLUSION

The theoretical exposition of monetary policy might appear uncomplicated. However, the choice of a monetary policy action is rather complicated in view of the surrounding uncertainties and the need for exercising complex judgment to balance growth and inflation concerns. Additional complexities arise in the case of an emerging market like India. There are many challenges which need to be addressed, such as rudimentary and noncompetitive financial systems, lack of integrated money and interbank markets, external uncertainties and issues related to operational autonomy of the central bank. Explicit inflation targeting requires a good degree of operational autonomy for the central bank and a system in which there is a good coordination between fiscal and monetary authorities.