Chanakya IAS Academy Blog

The article focus upon the various aspects of Monetary Policy Policy and its rules which have come into force.

  • The government recently gave statutory backing to the monetary policy committee (MPC).
  • It will make way for a resetting of the monetary policy framework that will shift the responsibility of maintaining inflation targets on a six-member panel, with the Reserve Bank of India (RBI) governor getting a casting vote in case of a tie.
  • At present, the RBI governor has the final say on monetary policy decisions.
  • According to the monetary policy framework, agreed by RBI and the government last year, the central bank will look to contain inflation within a band of 4% plus/minus 2 percentage points from next year.
  • The government has amended the RBI Act regarding constitution of MPC to give it the statutory backing. Those provisions have now come into force.
  • Composition of MPC:
    • The panel will have three members from RBI:
    • The governor as the chairperson.
    • Deputy governor of RBI.
    • One officer of RBI.
    • The other three members will be appointed by the centre based on the recommendations of a panel headed by the cabinet secretary and will be experts in the field of economics, banking, finance or monetary policy.
  • Composition of MPC:
    • Tenure: These experts will be appointed for four years and will not be reappointed.
  • The panel will meet at least four times a year and will publicize its decisions after each meeting.
  • As per rules, no member of MPC should have any financial or other interest that prejudicially affects his functions as a member.
  • Also, it will be considered that the panel failed in achieving the inflation target if the lower or the upper range of the target is breached for three consecutive quarters. The idea of setting up an MPC was mooted by an RBI-appointed committee led by deputy governor Urjit Patel in February 2014.
  • That committee had recommended a five-member committee where three members would be from RBI and two external members would be appointed by the RBI governor and the deputy governor in-charge.
  • It was also suggested that the governor would have a casting vote in case of a tie.
  • Advantages of setting up MPC:
    • It will bring transparency and predictability in inflation targeting.
    • The new framework also increases the responsibility of the government to maintain fiscal prudence.
    • Coordination between RBI and Government would be better.
    • It will bring flexible inflation targeting.
    • The new framework makes RBI more accountable as now it will have to explain to the government if it fails to meet the inflation targets.
    • This will put India on a par with other nations in terms of flexible inflation targeting.

Question:“It is essential to have a modern monetary policy framework to meet the challenge of an increasingly complex economy”. Discuss.

Suggested Approach:

  1. Challenges of Indian economy.
  2. Monetary Policy Framework decided by the government.
  3. How MPC will be helpful in tackling those challenges.
  4. Negatives, if any, that MPC will bring.


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