ET in the classroom: All you want to know about Monetary Policy Committee

Even as there is speculation whether RBI Governor Rajan, whose term expires in early September, will get an extension, Tuesday’s monetary policy statement could be the last one made by an RBI governor. The next policy statement will have the voice of the independent monetary policy committee which will be a binding on the RBI.

1. What is a monetary policy committee The Monetary Policy Committee ( MPC) is a committee of the central bank — Reserve Bank of India, headed by its Governor. It was set up by amending the RBI Act after the government and RBI agreed to task RBI with the responsibility for price stability and inflation targeting. The RBI and the government signed the Monetary Policy Framework Agreement on February 20, 2015.

2. What is the committee’s mandate? The MPC is entrusted with the task of fixing the benchmark policy interest rate ( repo rate) to contain inflation within the target level. The government may, if it considers necessary, convey its views, in writing, to the MPC from time to time. RBI is mandated to furnish necessary information to the MPC to facilitate their decision making.

3.How is this committee structured? According to the government, the MPC will have six members. Three each will be nominated by the government and the RBI and each member will have one vote. While the majority voice of the committee will be final in deciding the interest rates and the RBI will have to accept the verdict, the governor gets a casting vote in case of tie.

4.How is it different from current practice followed by the RBI? Currently, a technical advisory committee constituted by the RBI, which consists central bank’s top brass including the deputy governor and the governor and external advisors, give their opinion and suggestions on what the RBI should do. But the governor’s word is final on the rates and the advice of the technical advisors is not binding on the RBI

5. What is the global experience in this regard? Most of these countries have implemented their monetary policy targets through MPCs after formally adopting inflation targeting as a monetary policy objective. Notable among countries which have adopted inflation targeting as a monetary policy objective are New Zealand, England, Canada, South Africa, Sweden, among others. Research has found that inflation, in general, had come down to a much acceptable level in many countries after adopting inflation targeting than before.