Monetary Policy Committee (MPC) of RBI

10 Feb 2024 Monetary Policy Committee (MPC) of RBI

Source – The Hindu and PIB.

General Studies – Growth of Indian Economy, Banking and Economy, RBI, Monetary Policy Committee, Inflation, Repo Rate, Reverse Repo Rate, Liquidity Adjustment Facility, Bank Rate, Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Market Stabilization Scheme (MSS)।

Why in the news? 

• In February 2024, The Monetary Policy Committee (MPC) of the RBI ensured that inflation remains increasingly in line with the target by keeping interest rates unchanged and sticking to its stance of ‘withdrawal of accommodation’ has been chosen as a prudent option to continue the objective of.
• With a 5-1 majority in the voting among the RBI’s Monetary Policy Committee (MPC) members, it has committed to keeping the monetary policy deflationary to control inflation. Especially when ‘large and repetitive price shocks are disrupting the pace of deflation’.
• Behind the repo rate being kept unchanged at 6.5% in the sixth meeting of the Monetary Policy Committee (MPC), Governor Shaktikanta Das said domestic economic momentum remains strong. Uncertainties in food prices are impacting the headline inflation trajectory. Are.
• The majority of the MPC was united in prioritising the fight against inflation. This should be seen in the backdrop of recent trends in retail inflation. Headline retail inflation declined from a 15-month high of 7.4% in July 2023 to 4.87% in October 2023. However, it reached a four-month high of 5.69% in December 2023.
• The increase in food prices was estimated by the Consumer Food Price Index to be 9.53%, which is 292 basis points more than 6.61% in October 2023.
• The MPC cut its estimate of average retail inflation in the January-March quarter to 5.0%, 20 basis points lower than the December forecast, indicating that policymakers have considered seasonal improvement along with improvement in Rabi sowing.
• The Department of Consumer Affairs’ daily price monitoring dashboard shows that the average retail prices of more than two-thirds of major food items remained higher year-on-year through February 8, 2024.
• Policymakers must remain firm in their resolve to permanently slow price growth towards the 4% target or risk-reducing consumption, thus weakening growth momentum.

Monetary Policy Committee: 

• The Monetary Policy Committee is a committee constituted by the Government of India which was formed on June 27, 2016, to make interest rate determination more useful and transparent. Policymaking in India has been handed over to a newly constituted Monetary Policy Committee by amending the Reserve Bank of India Act.
• In May 2016, the Reserve Bank of India (RBI) Act, 1934, was amended to provide for a flexible inflation targeting framework. The amended RBI Act also provides that the Government of India will set an inflation target once every 5 years in consultation with the Reserve Bank. The first meeting of the MPC was held on 3 October 2016 in Mumbai.
• Under Section 45ZB of the RBI Act, 1934, amended in 2016, the central government has the right to constitute a six-member Monetary Policy Committee (MPC).
• Section 45ZB states that the Monetary Policy Committee will determine the policy rate necessary to achieve the inflation target.
• The decision of the Monetary Policy Committee in India will be binding on banks. 

Composition of Monetary Policy Committee

• The Chairman of the Monetary Policy Committee is the Governor of the Reserve Bank of India, and at present, the Chairman of the Monetary Policy Committee is the Governor of the Reserve Bank of India, Shaktikanta Das.
• As per Section 45 ZB, the Monetary Policy Committee of RBI will consist of 6 members.
• The Governor of RBI is its ex-officio Chairman.
• The deputy governor is in charge of monetary policy.
• It has a bank officer nominated by the Central Board as its member.
• The Central Government appoints three persons to the Monetary Policy Committee.
• Under this process, competent and impartial persons with knowledge and experience in economics, banking, finance or monetary policy will be appointed. 

Tenure of members of the Monetary Policy Committee:

• Monetary Policy Committee The tenure of the members will be for four years only, and they will not be eligible for reappointment.

• The members of the Monetary Policy Committee are appointed for four years only. 

Presently members of the Monetary Policy Committee of India:

At present, the following are the 6 members of the Monetary Policy Committee of India –

• Shaktikanta Das (Governor of RBI)
• Michael Debabrata Patra (Deputy Governor)
• Ashima Goyal
• Shashank Bhide
• Rajeev Ranjan
• Jayant R. Verma.

Monetary policy :

• In monetary policy, act monetary means at its disposal to achieve specified goals regarding the use of refers to the central bank’s policy.
• RBI’s monetary policy’s primary objective is to keep price stability in mind. Price stability for sustainable development is a necessary pre-condition.
• Amended RBI Act, 1934 by the Government of India in consultation with the Reserve Bank once every five years. Inflation target (4% + -2%)There is also a provision to determine.

The objective of the Monetary Policy Committee:

• The primary objective of RBI’s monetary policy is to maintain price stability while keeping the objective of growth.
• Price stability is a necessary condition for sustainable development.
• The work of the Monetary Policy Committee is also to prepare the country’s citizens to face the challenges of an increasingly complex economy.
• The function of the Monetary Policy Committee is also to maintain inflation at a certain level (4%+/-2%).
• The Reserve Bank of India (RBI) is responsible for keeping the inflation target at 4% (with a deviation of 2%).

• Improving the repo rate and reverse repo rate is also the work of the Monetary Policy Committee.

• Determining the policy interest rate is also the work of the Monetary Policy Committee.
• Work of the Monetary Policy CommitteeIt is also to provide reasonable price stability.
• Keeping the rate stable is also the job of the Monetary Policy Committee.
• Work of Monetary Policy CommitteeAttention must also be paid to exchange rate stability.
• In the development of the economy. Providing momentum is also the job of the Monetary Policy Committee.
• Work of Monetary Policy Committee: Employment generation in the country, including focusing on.

Indian Economy and Banking Terminology: 

Repo rate :

• The interest rate at which the Reserve Bank provides overnight liquidity to banks on the collateral of government and other approved securities under the Liquidity Adjustment Facility (LAF).

Reverse Repo Rate:

• The interest rate at which the Reserve Bank receives liquidity from banks daily under the Liquidity Adjustment Facility (LAF).

Liquidity Adjustment Facility:

• The Liquidity Adjustment Facility (LAF) includes daily and term repo auctions.
• The purpose of term repos is to facilitate the development of an interbank term money market, which in turn can set market-based benchmarks for pricing loans and deposits and thus improve monetary policy transmission.
• RBI also conducts variable interest rate reverse repo auctions, as required under market conditions.

Marginal Standing Facility (MSF) :

• It is a facility under which scheduled commercial banks can charge a penal interest rate by borrowing an additional amount of overnight currency from the Reserve Bank of India up to a limit in their Statutory Liquidity Ratio (SLR) portfolio.
• It acts as a safety valve to the banking system against unexpected liquidity shocks.

Corridor:

• The MSF and reverse repo rates determine the corridor for daily movement in the weighted average call money rate.

Bank rate :

• It is the rate at which the Reserve Bank is ready to buy or exchange bills of exchange or other commercial papers. The Bank Rate is published under Section 49 of the Reserve Bank of India Act, 1934.
• This rate is linked to the MSF rate and hence changes automatically when the MSF rate changes with the policy repo rate.

Cash Reserve Ratio (CRR):

• The share of net demand and time liabilities that banks are required to maintain as cash balances with the Reserve Bank are notified by the Reserve Bank in the Gazette of India from time to time.

Statutory Liquidity Ratio (SLR):

• The share of net demand and time liabilities that banks hold in secured and liquid assets such as unencumbered government securities, cash and gold.
• Changes in SLR often affect the availability of resources in the banking system for lending to the private sector.

Open Market Operations (OMO):

• These include outright purchase/sale of government securities and infusion/absorption of sustainable liquidity.

Market Stabilization Scheme (MSS):

• It was started in 2004 for monetary management in India.
• In this, surplus liquidity of a more permanent nature arising from large capital inflows is absorbed through the sale of short-term government securities and revenue bills.
• The cash raised is kept in a separate government account with the Reserve Bank. 

Conclusion/Solution:

• External members are government nominees who are appointed based on the recommendations of a search cum selection committee consisting of the Cabinet Secretary (Chairman), the RBI Governor and the Secretary of the Department of Economic Affairs (Union Finance Ministry). Nominated members must have knowledge of economics, banking or monetary policy.
• MPC nominees will hold office for four years and will not be eligible for reappointment. The RBI prohibits the appointment of MPs, legislators, public servants, staff/committee members of the RBI, anyone with a conflict of interest with the RBI, or anyone above 70 years of age.
• The Central Government also retains the power to remove its nominees from the MPC, subject to certain conditions and if required. 

Practice Questions for Preliminary Exam:

Q.1. Consider the following statements regarding the Monetary Policy Committee of RBI.

1. The members of the Monetary Policy Committee are appointed for six years only.
2. The Chairman of the Monetary Policy Committee is the Governor of the Reserve Bank of India.
3. In India, the decision of the Monetary Policy Committee is binding on the banks.
4. Members of the Monetary Policy Committee are eligible for reappointment.

Which of the above statement/statements is correct?

1.  1, 2 and 3 only
2.  2, 3 and 4 only
3.  1 and 4 only
4.  2 and 3

Amit Pradhan

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