Monetary policy committee
Recently Reserve Bank of India’s Monetary policy committee was in news due to its decision to keep the repo rate unchanged at 4% due to increase in Covid 19 cases that has prompted many states to impose lockdown .
What is Monetary policy committee ?
Monetary policy committee is a committee of Reserve Bank of India which constitutes the monetary policy of country with the help of monetary tools like repo rate , reverse repo rate etc to obtain the inflation target.
Monetary policy – refers to policy laid down by the central bank to manage money supply, interest rates, inflation in the market and overall growth of the economy.
Background –
Formation
• In 2014 a committee was set up by Reserve Bank of India under Urijit Patel (then deputy governor of Reserve Bank of India) who recommended the formation of monetary policy committee.
• In 2016 Reserve Bank of India Act 1934 (which authorizes Reserve Bank of India to determine the monetary policy ) was amended by Finance Act (India) 2016 to constitute Monetary policy committee.
• It was inserted under section 45ZB of Reserve Bank of India Act 1934 and provided for an Monetary policy committee to be constituted by central government.
• It come into force on 27 June 2016.
Purpose
• To bring more accountability and transparency in determining monetary policy as Prior to amendment RBI governor along with a team of officials from central bank decide on policy rate but governor has ultimate power to take decisions.
Outcome
• For first time an explicit inflation target was given to RBI along with failure level.
• This amendment provided a statutory backing for the implementation of flexible inflation targeting.
• Also provides for regulating of inflation target by government of India in consultation with RBI every five year.
• Committee was granted the responsibility to control inflation rate (consumer price index) as 4 % with upper tolerance as 6% and lower at 2%.
Structure of Monetary policy committee
It consist of 6 members – 3 members from Reserve Bank of India and 3 members nominated by government
Working
• Monetary policy committee meetings are held at-least 4 times a year ( review in every 2 months )
• In these meetings policy rates are finalized taking in account domestic as well as international scenario after discussion
• Monetary policy committee is assisted by Reserve Bank of India’s monetary policy department in formulation of monetary policy
• In case of no consensus voting is done (in case of tie governor have a casting vote )
• The quorum of meeting is fixed at 4 i.e in a meeting of committee attendance of minimum 4 member is compulsory.
Function –
the Monetary policy committee regulate the policy interest rate to maintain price stability and expand the growth rate of the economy Interesting fact – for confidentiality members of the committee need to observe a period of silence 7 days before and after, for rate decision.
Source –
- Wikipedia,
- RBI official website
-Krishna