WHAT IS MONETARY POLICY COMMITTEE?

 

WHAT IS MONETARY POLICY?

• It refers to to the policy of the central bank with regard to the use of monetary instruments under its control to achieve the goals specified in the act.
• The primary objective of the RBI's monetary policy is to maintain price stability while keeping in mind the objective growth.
• Price stability is a necessary precondition to sustainable growth.
• The amended RBI act, 1934 also provide for the inflation target (4% +-2%) to set by the Government of India , in consultation with Reserve Bank, once in every five years.

INSTRUMENTS OF MONETARY POLICY

1. Repo Rate
2. Reverse Repo Rate
3. Liquidity Adjustment Facility
4. Marginal Standing Facility
5. Corridor
6. Bank Rate
7. Cash Reserve Ratio
8.  Statutory Liquidity Ratio
9. Open Market Operations
10. Market Stabilization Scheme

MPC

• Origin ; Under Section 45ZB of the amended ( in 2016) RBI act 1934, the central government is empowered to constitute a Six member Monetary Policy Committee(MPC).
• Objective; Further , Section 45ZB lays down that "the monetary policy committee shall determine the policy rate required to achieve the inflation target."
• The decision of the monetary policy committee shall be binding on the bank.
• Composition ; Section 45ZB  says that the monetary policy committee shall consist of 6 members ;

1.  RBI Governor as it's ex officio Chair person 
2. Deputy Governor in charge of monetary policy 
3. An officer of the Bank to be nominated by the central board
4. Three persons to be appointed by by the central government

This category of appointments must be from "Persons of ability, integrity and standing, having knowledge and experience in the field of economics or banking or finance or monetary policy".

MONETARY POLICY FRAME WORK

• Origin ; In May 2016 , the RBI Act was amended to provide a legislative mandate to the central bank to operate the country's monetary policy frame work.
• Objective; The frame work aims at setting the policy (repo) rate based on an assessment of the current and evolving macroeconomic situation, and modulation of liquidity conditions to anchor money market rates at or around the repo rate.
• Reasons for Repo Rate as Policy Rate: Repo Rate changes transmit through the money market through the money market to the entire financial system , which, in turn influences aggregate demand
• Thus it is a key determinant of inflation and growth.