Context

• Recently, A dissident member of the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) has said that the central bank’s accommodative policy stance “carries with it the risk of falling behind the curve in future because the stance limits the MPC’s freedom of action in ensuing meetings”.

About Monetary policy

• 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.
• In May 2016, the RBI Act was amended to provide a legislative mandate to the central bank to operate the country’s monetary policy framework.
  • The framework, according to the RBI website, “aims at setting the policy (repo) rate based on an assessment of the current and evolving macroeconomic situation; and modulation of liquidity conditions to anchor money market rates at or around the repo rate.
• “Repo rate changes transmit through the money market to the entire the financial system, which, in turn, influences aggregate demand – a key determinant of inflation and growth.”

About Monetary Policy Committee

• The MPC fixes the benchmark interest rate — or the base or reference rate that is used to set other interest rates — in India.
• Under Section 45ZB of the amended RBI Act, 1934, the central government is empowered to constitute a six-member Monetary Policy Committee (MPC) to determine the policy interest rate required to achieve the inflation target.
• The first such MPC was constituted on September 29, 2016.
• The decision of the Monetary Policy Committee shall be binding on the Bank”.
• Members of MPC
  • Section 45ZB says the MPC shall consist of the
    • 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.
    • The last 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”. (Section 45ZC)

Source: IE

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