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What is a Monetary Policy Committee & Consumer Price Index (CPI)? Definition & Functions - RBI Rates

Mutual fund investments are subject to market risks read all scheme related documents carefully, the reserve bank of india's monetary policy committee is likely to increase its key policy rate called the Repo rate or the rate at which commercial banks borrow from the RBI for the third time since the cycle of rate hikes.

Began in may this year, the resolution of the MPC is likely to be announced today there is little doubt that the MPC would raise the repo rate again as CPI inflation has stayed high and central banks across the globe have been raising their policy rates the quantum of the hike however remains a guessing game among the close observers of the monetary policy today.

What is RBI's MPC, What does it look into and Why does india need an MPC in the first place?

Let's address it one by one monetary policy committee is nothing but a panel of six members that sit together once in two months to review the state of the indian economy. It undertakes a thorough review of the price situation in the economy and target that consumer price inflation or the CPI is maintained around four percent in the medium term the main task of the MPC under section 45 of the RBI act is to determine the policy rate required to achieve the inflation target of 4 percent to suppress or boost aggregate demand in the economy, which is a key determinant of inflation and growth the inflation target is set by the indian government under the monetary policy framework engrained in the RBI act of 1934.

Now under this framework called flexible inflation targeting the RBI has to maintain retail inflation at four percent for five years with a tolerance band of two percent on the upside or on the downside the framework was introduced in 2016 through an official notification of the government and was valid till march 31st 2021.

Last year the same inflation target was extended by another five years to march 31st 2026. Now what happens when the MPC is not able to target inflation at four percent or What does it mean when we say that RBI has failed to meet the inflation target?

Now under the monetary policy framework, if the average inflation is more than the upper tolerance level of the inflation target that is six percent for any three consecutive quarters or the average inflation is less than the lower tolerance level that is two percent for any three consecutive quarters the RBI would be deemed to have failed to meet the inflation target and if such an event arises as is the case currently where the CPI inflation has remained above six percent for six consecutive months and is likely to remain above this level it has to set out in a report to the central government the reasons for the failure to achieve the inflation target.

It also has to give remedial actions which the central bank will undertake to address this and an estimate of the time period within which the inflation target will be achieved pursuant to timely implementation of the proposed remedial actions.

Now before we move to, why we need a monetary policy committee let's look at who are those six members? Who decide the repo rate in india?

The first member of the MPC is the governor of the reserve bank of india who also chairs the MPC meetings the current governor of the reserve bank of india is former secretary to the indian government shakti, the second member is the deputy governor of the central bank who's also in charge of the monetary policy department in the central bank he is Dr Michael Patra this is followed by one of RBI's executive directors Rajeev Ranjan these were the members from the reserve bank of india there are three external members too the first external member is Ashima Goyal who's also a professor at the indira gandhi institute of development and research in mumbai, the second member is Jayanth Varma, who is a professor at indian institute of management ahmedabad and the last member is Dr Shashan Bide he's a senior advisor at ncaer or national council of applied economic research in delhi the external members of the MPC holds the office for a period of four years or until further orders whichever is earlier now the mandate of the mpc is to meet at least four times in a year each member of the MPC has one vote and in the event of an equality of votes the governor has a second or a casting vote each member of the MPC writes a statement specifying the reasons for voting in favor of or against the proposed resolution.

Now why does india need a monetary policy committee?

Before the formation of monetary policy panel there was criticism that india lacked an institutional framework to set key policy rates in the economy and RBI was the sole signing authority on the ripper rate and that would be the RBI governor after assuming office in september 2013 as the RBI governor Dr Raghuram Rajan tasked his then deputy governor Surjeet Patel to constitute a panel of outside experts and rbi staff to come up with suggestions in three months on what needs to be done to revise and strengthen india's monetary policy framework a number of past committees including the financial sector legislative and reforms commission have opined on this and their views were also to be taken into consideration in january 2014 the recommendation of the Surjeet Patel panel were made and thus the monetary policy committee was formed.

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