Monetary Policy Committee

Introduction

• The Monetary Policy Committee (MPC) constituted by the Central Government under Section 45ZB determines the policy interest rate required to achieve the inflation target. 
• Under Section 45ZB of the amended RBI Act, 1934, the central government is empowered to constitute a six-member Monetary Policy Committee (MPC) to determine the policy interest rate required to achieve the inflation target. The first such MPC was constituted on September 29, 2016.

Objective of MPC

• The primary objective of the RBI’s monetary policy is to maintain price stability while keeping in mind the objective of growth. 
• Price stability is a necessary precondition to sustainable growth. 
• To meet the challenges of an increasingly complex economy.
• To target inflation, i.e., to maintain inflation to a certain level (4 % +/- 2%). The Reserve Bank of India (RBI) is responsible for containing inflation targets at 4% (with a deviation of 2%) 

Composition of MPC

• There are a total of six members in the committee, three members are from RBI itself and the rest of them are appointed by the Government of India. 
• The MPC consists of  six members:

1. RBI Governor (Chairperson)
2. RBI Deputy Governor in charge of monetary policy,
3. One official nominated by the RBI Board 
4. The Government of India will propose three members [committee chaired by the Cabinet Secretary]. 
5. Members of the MPC will serve for four years and are not eligible for reappointment. 

• The members of the Monetary Policy Committee are appointed for four years. 

Important Note

• The external members are the nominees of the Government who are appointed based on the recommendations of a search cum selection committee consisting of cabinet secretary (Chairperson), RBI Governor and the secretary of the Department of Economic affairs ( Union Ministry of Finance). The nominated members must have knowledge in the field of Economics, banking or monetary policy.
• The nominees of MPC will hold office for a period of four years and will not be eligible for re-appointment. RBI prohibits appointment of MPs , legislatures, public servants or employee/ committee members of RBI or anyone with a conflict of interest with RBI or anybody above age 70 years. 
• The Central government also retains the powers to remove its nominees from MPC subject to certain conditions and if the situation warrants the same.