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Monetary Policy Committee: Inflation Target

Monetary Policy Committee: RBI

The Monetary Policy Committee (MPC) of the Reserve Bank of India’s (RBI) noted that the central bank’s accommodative policy stance may fail to comply with the Inflation target (upper limit of 6%).

  • An accommodative stance indicates a willingness on the part of the central bank to expand money supply and cut interest rates.
  • The MPC fixes the benchmark interest rate — or the base or reference rate that is used to set other interest rates — in India.

Monetary policy:

  • Monetary policy refers to the policy of the central bank with regard to the use of monetary instruments under its control to achieve the goals specified in the Act.
  • The primary objective of the RBI’s monetary policy is to maintain price stability while keeping in mind the objective of growth.
  • Price stability is a necessary precondition to sustainable growth.
  • The amended RBI Act, 1934 also provides for the inflation target (4% +-2%) to be set by the Government of India, in consultation with the Reserve Bank, once in every five years.

Monetary Policy Committee (MPC)?:

  • Under Section 45ZB of the amended (in 2016) RBI Act, 1934, the central government is empowered to constitute a six-member Monetary Policy Committee (MPC).
  • Further, Section 45ZB lays down that “the Monetary Policy Committee shall determine the Policy Rate required to achieve the inflation target”.
  • The decision of the Monetary Policy Committee shall be binding on the Bank.
  • Composition: Section 45ZB says the MPC shall consist of 6 members:
    • RBI Governor as its ex officio chairperson,
    • Deputy Governor in charge of monetary policy,
    • An officer of the Bank to be nominated by the Central Board,
  • Three persons to be appointed by the central government.
  • This category of appointments must be from “persons of ability, integrity and standing, having knowledge and experience in the field of economics or banking or finance or monetary policy”.

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