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Context

• The Reserve Bank of India's Monetary Policy Committee (MPC) met amidst ongoing concerns about inflation, economic growth, and financial stability.

Details

• This meeting was closely watched by analysts, investors, and policymakers as the committee's decisions have significant implications for the economy.
• The key outcomes of this meeting include maintaining the repo rate at 6.5% for the eighth consecutive time and keeping the monetary policy stance unchanged at 'withdrawal of accommodation'.
• These decisions were made against the backdrop of sticky food inflation, an upward revision in GDP growth forecasts, and a cautious economic outlook.

Key Decisions

Repo Rate

• Status: Kept steady at 6.5% for the eighth consecutive time.
• Reason: Persistent inflation concerns, particularly related to food prices.

Monetary Policy Stance

• Status: Remained unchanged at 'withdrawal of accommodation'.
• Implication: Indicates a cautious approach towards monetary easing in the near term.

Economic Projections

GDP Growth Forecast for FY25

• Revised Upward: Increased to 7.2% from the previous 7%.
• Market Reaction: The stock market responded positively, with the Sensex rising nearly 1%, or over 700 points, to 75,814 after the announcement.

Retail Inflation Forecast

• Unchanged: Held steady at 4.5%.
• Despite the revision in GDP growth, inflation forecasts remain a concern due to ongoing food price pressures.

Monetary Policy Committee (MPC)

Responsibilities

• Fixing Benchmark Interest Rate: The MPC is tasked with setting the benchmark interest rate, which is a crucial element of monetary policy influencing the cost of borrowing and overall economic activity in India.

Meeting Schedule

• Frequency: The MPC meets at least four times a year, ensuring that there is at least one meeting per quarter.
• Publication of Decisions: After each meeting, the decisions made by the MPC are published to inform the public and markets of any changes or continuations in monetary policy.

Committee Composition

• Members: The MPC comprises six members:
• RBI Officials: Three members are officials from the Reserve Bank of India.
• External Members: Three members are nominated by the Government of India, providing an external perspective to the committee.
• Chairperson: The Governor of the Reserve Bank of India acts as the ex officio chairperson of the MPC.
• Silent Period: To maintain utmost confidentiality, members must observe a silent period seven days before and after the rate decision, during which they do not discuss the policy or potential decisions publicly.

Decision-Making Process

• Voting: Decisions are made by a majority vote among the six members.
• Casting Vote: In case of a tie, the Governor of the RBI has the casting vote, giving the Governor the power to break any deadlocks.

Current Mandate

• Inflation Target: The current mandate for the MPC is to maintain an annual inflation rate of 4%.
• Tolerance Range: This mandate includes a tolerance range with an upper limit of 6% and a lower limit of 2%.
• Time Frame: This target is set until 31 March 2026, providing a clear framework for the MPC's decisions over the next few years.

Legislative Background

• Amendments to RBI Act: The Reserve Bank of India Act, 1934, was amended by the Finance Act (India), 2016, to establish the MPC.
• Purpose: These amendments aimed to bring more transparency and accountability to the process of fixing India’s monetary policy, ensuring that decisions are made systematically and are well-documented.

Accountability and Reporting

• Publication of Opinions: After every meeting, the MPC publishes not only its decisions but also the opinions of each member, providing transparency into the decision-making process.
• Government Accountability: The MPC is accountable to the Government of India, particularly if inflation deviates from the prescribed range of 2% to 6% for three consecutive quarters. This ensures that the committee’s actions remain aligned with the broader economic goals of the country.

Establishment and Purpose

Historical Context

• Pre-MPC Era:
• Prior to the establishment of the MPC, key decisions on benchmark interest rates were taken solely by the Governor of the Reserve Bank of India.
• The Governor is appointed by the government and can be disqualified by it at any time, leading to potential uncertainty and friction, especially during periods of low growth and high inflation.

Advisory Bodies Before MPC

• Technical Advisory Committee (TAC):
• Advised the Reserve Bank on the stance of monetary policy.
• Composed of experts from monetary economics, central banking, financial markets, and public finance.
• Had only an advisory role with no decision-making power.

Proposal and Establishment of MPC

• Urjit Patel Committee:
• First proposed the establishment of a six-member MPC.
• Suggested three members from the RBI and three nominated by the government.
• Government’s Initial Proposal:
• Proposed a seven-member committee with three RBI members and four government-nominated members.
• Current Composition:
• Resulted from negotiations, forming a six-member committee as originally suggested by the Urjit Patel Committee.
• External members have a four-year term.

Operational Framework

• Monetary Policy Department (MPD):
• Assists the MPC in formulating the monetary policy.
• Incorporates views from key stakeholders and analytical work from the Reserve Bank.
• Financial Markets Operations Department (FMOD):
• Operationalizes the monetary policy through day-to-day liquidity management.
• Financial Markets Committee (FMC):
• Meets daily to review liquidity conditions.
• Ensures the operating target of monetary policy (weighted average lending rate) aligns closely with the policy repo rate.

Timeline and Legal Foundation

• MPC Implementation:
• Came into force on 27 June 2016.
• Legislative Amendment:
• The Reserve Bank of India Act, 1934, was amended by the Finance Act (India), 2016, to constitute the MPC, promoting transparency and accountability in monetary policy.

Historical Proposals for MPC

• Early Proposals:
• YV Reddy Committee (2002): First suggested the establishment of an MPC.
• Tarapore Committee (2006).
• Percy Mistry Committee (2007).
• Raghuram Rajan Committee (2009).
• Urjit Patel Committee (2013): Ultimately led to the current formation and implementation of the MPC.

Composition

The composition of the current Monetary Policy Committee (MPC) is as follows:

Ex Officio Members

Governor of the Reserve Bank of India – Chairperson

Holding the ultimate responsibility for guiding monetary policy decisions.

Deputy Governor of the Reserve Bank of India in charge of monetary policy

Plays a critical role in the formulation and implementation of monetary policy.

Executive Director of the Reserve Bank of India in charge of monetary policy

Provides executive oversight and contributes to policy discussions and decisions.

External Members Nominated by the Government

Expertise:

Economic advisory, development research.

Research on agriculture, poverty analysis, and macroeconomics.

Finance, accounting, capital markets regulation.

Terms of Office

• External Members' Term: The three external members hold office for a period of four years from their appointment date.
• Reappointment: Central government nominees are not eligible for reappointment after their four-year term.

PRACTICE QUESTION Q. Which committee first suggested the establishment of a Monetary Policy Committee (MPC) in India? A) Percy Mistry Committee (2007) B) Urjit Patel Committee (2013) C) Raghuram Rajan Committee (2009) D) YV Reddy Committee (2002) Answer: D) YV Reddy Committee (2002)

SOURCE: INDIAN EXPRESS