The Monetary Policy Committee (MPC)

The Monetary Policy Committee (MPC)

• The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) decided at a meeting to keep the interest rates unchanged in the wake of a rise in inflation but emphasized that there would be space for a rate reduction
• This is the second straight policy review meeting where the rates have been kept unchanged. The RBI reduced the rates by 135 bps between February and October 2019 before pressing the pause button in the December policy review. 
• The central bank took two measures that could ease lending rates further. One, it opened a window to extend ₹1 lakh crore to the commercial banks at the repo rate, which is 5.15%. Second, banks have been exempted from maintaining the cash reserve ratio which is 4% of the net demand and time liabilities now — for home, auto and MSME loans that are extended from January 31 to July 31.
• The GDP growth for the next financial year is projected at 6%, in the range of 5.5­6% in the first half of the FY-21 and 6.2% in Q3. The growth projection for the current financial year was 5%. 
• The outlook for the consumer price index­based inflation has been revised upward to 6.5% for the fourth quarter of the current financial year and 5.4­5.0% for the first half of 2020­21. It’s projected at 3.2% for the third quarter of the next financial year.
• Markets reacted positively to the tone, with the yield on the 10­year benchmark government paper dropping 6 bps to close the day at 6.45%. Economists said that with RBI worried about growth recovery, the next rate cut could be as early as in April ­ the next policy review meeting.

About MPC

• The Monetary Policy Committee of India is responsible for fixing the benchmark interest rate in India. The meetings of the Monetary Policy Committee are held at least 4 times a year and it publishes its decisions after each such meeting.
• The committee comprises six members - three officials of the Reserve Bank of India and three external members nominated by the Government of India. They need to observe a "silent period" seven days before and after the rate decision for "utmost confidentiality". The Governor of Reserve Bank of India is the chairperson ex officio of the committee. Decisions are taken by a majority with the Governor having the casting vote in case of a tie. The current mandate of the committee is to maintain 4% annual inflation until 31 March 2021 with an upper tolerance of 6% and a lower tolerance of 2%.
• The Reserve Bank of India Act, 1934 was amended by Finance Act (India), 2016 to constitute MPC which will bring more transparency and accountability in fixing India's Monetary Policy. The monetary policy is published after every meeting with each member explaining his opinions. The committee is answerable to the Government of India if the inflation exceeds the range prescribed for three consecutive months

Establishment and purpose

• Key decisions about benchmark interest rates used to be taken by the Governor of Reserve Bank of India alone before the establishment of the committee. The Governor of RBI is appointed and can be disqualified by the Government anytime. This led to uncertainty and resulted in friction between the Government and the RBI, especially during times of low growth and high inflation. 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 Reserve Bank on the stance of monetary policy. However, its role was only advisory in nature.
• The setting up of a committee to decide on Monetary Policy was first proposed by the Urjit Patel Committee. The Committee suggested a five-member MPC - three members from the RBI and two nominated by the Government. The Government initially proposed a seven-member committee- three from the RBI and four nominated by it. Subsequent negotiations led to the current composition of the committee, with the external members having a four-year term.
• The Reserve Bank’s Monetary Policy Department (MPD) assists the MPC in formulating the monetary policy. 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) operationalizes the monetary policy, mainly through day-to-day liquidity management operations. The Financial Markets Committee (FMC) meets daily to review the liquidity conditions to ensure that the operating target of monetary policy (weighted average lending rate) is kept close to the policy repo rate. Monetary Policy Committee came into force on 27 June 2016.
• Suggestions for setting up a Monetary policy committee are not new and go back to 2002 when the YV Reddy committee proposed to establish an MPC, then Tarapore committee in 2006, Percy Mistry committee in 2007, Raghuram Rajan committee in 2009 and then Urjit Patel Committee in 2013.

Source: The Hindu