Previous Year Question
Which of the following statements is/are correct regarding the Monetary Policy Committee?
It decides the RBI’s benchmark interest rates.
It is a 12-member body including the Governor of the RBI and is reconstituted every year.
It functions under the chairmanship of the Union Finance Minister.
Select the correct answer using the code given below:
1 only
1 and 2 only
3 only
2 and 3 only
Correct Answer: A
Detailed Solution
The Monetary Policy Committee, or MPC, received statutory status through amendments made to the RBI Act, 1934 by the Finance Act, 2016. Its purpose was to institutionalise monetary-policy-rate decisions through a committee-based process.
Statement 1 is correct.
Under Section 45ZB of the RBI Act, the MPC determines the Policy Repo Rate required to achieve the inflation target. The Repo Rate is the principal benchmark policy rate, and its changes may influence other short-term interest rates, bank lending rates and broader financial conditions.
Under India’s flexible inflation-targeting framework, the Central Government determines the Consumer Price Index-based inflation target in consultation with the RBI. The MPC decides the Repo Rate after considering this target.
Statement 2 is incorrect.
The MPC is not a 12-member body. It consists of six members—three members from the RBI and three external experts appointed by the Central Government.
The RBI members are:
the RBI Governor, who serves as ex-officio Chairperson;
the Deputy Governor in charge of monetary policy; and
one officer of the RBI nominated by its Central Board.
The Central Government appoints three persons possessing knowledge and experience in economics, banking, finance or monetary policy. External members hold office for four years and are not eligible for reappointment. The MPC is therefore not reconstituted every year.
Statement 3 is incorrect.
The Union Finance Minister does not chair the MPC. The Governor of the RBI is its ex-officio Chairperson.
Each member has one vote. In the event of an equality of votes, the RBI Governor has a casting vote. The MPC’s decision is binding on the RBI.
The MPC is legally required to meet at least four times a year. In practice, it ordinarily meets according to the bi-monthly monetary-policy schedule. Following a meeting, the resolution, each member’s vote and the statement supporting that vote are published.