Monetary Policy Framework

Monetary Policy Committee:

Now, MPC will decide monetary policy instead of RBI Governor doing it single handily there by bringing more accountability and thought into it.
Amendment to RBI Act removed the governor’s powers to singularly set monetary policy vesting them in a six-member Monetary Policy Committee
Last year, the government and the Reserve Bank of India (RBI) had agreed to adopt a monetary policy framework, which will make taming inflation the primary priority of the central bank’s policy decisions.
What MPC will do?
The MPC will set interest rates to keep retail inflation within targets. Inflation targets will be set once every five years
The committee will have six members. Of the six members, the government will nominate three. The RBI Governor will chair the committee. The governor, however, will not enjoy a veto power to overrule the other panel members, but will have a casting vote in case of a tie. No government official will be nominated to the MPC.
  • The other three members would be from the RBI with the governor being the ex-officio chairperson. Deputy governor of RBI in charge of the monetary policy will be a member, as also an executive director of the central bank. Decisions will be taken by majority vote with each member having a vote.
  • The government nominees to the MPC will be selected by a Search-cum-Selection Committee under Cabinet Secretary with RBI Governor and Economic Affairs Secretary and three experts in the field of economics or banking or finance or monetary policy as its members.
  • Members of the MPC will be appointed for a period of four years and shall not be eligible for reappointment
Present Scenario:
At present, the RBI’s Monetary Policy Department (MPD) assists the governor in formulating the monetary policy. Views of all key stakeholders in the economy, advice of the Technical Advisory Committee (TAC) contribute to the process for arriving at the key decision on policy repo rate — the rate at which the central bank lends to banks. The governor, however, has overriding powers to decide on interest rates
Recently the Reserve Bank of India (RBI) and the union government signed Monetary Policy Framework Agreement between them which is hailed as historic. Examine its highlights and this pact’s importance to Indian economy. (200 Words)
For past few years, India has been fighting against price rise at monetary level, not with much success. This time addressing few structural constraints partially in budget,  government has strengthened its monetary front by entering into a pact with RBI. Key highlights are:
  • Reasserting that monetary policy will be solely handled by RBI preempting long standing friction between FM and RBI governor.
  • Setting clear inflation target- by January 2016, CPI would be contained below 6% and following years, it will vary between a 2% band. This will bring taming inflation to forefront for RBI giving secondary priority to interest rate cut, thus somehow resolving the growth-inflation dilemma.
  • Accountability– criteria have been set that will determine when RBI missed the target. In such case it has to explain to government the causes and state remedial measures that will be taken. It will publish a biyearly document explaining people the source of inflation.
  • Its inflation forecast for next 6-8 months will give an officials estimate enabling many to form strategies accordingly.
  • A monetary policy committee will bring in more objectivity avoiding the view of RBI governor alone.
Importance to Indian economy:
  1. Huge relief to common men
  2. Increase in expenditure by people boosting growth
  3. Increase in saving rate making more capital available for investment.
  4. No more gold rush- no more CAD deficit and unstable exchange regime
  5. With better investment avenues no need to look only for real estate inflating it price to unacceptable level- a good sign for government’s housing for all by 2022 scheme. And yes less black money in this sector.
Such institutionalized measure to battle inflation has given more confidence but government must do more to address the structural issues like supply chain constrains.
Do you think the new monetary policy framework signed between government of India and the RBI will help the latter get more autonomy? Critically examine. (200 Words)
Based on Urijit Patel Committee recommendations, government and the Reserve Bank of India (RBI) agreeing over a new monetary policy framework with the primary objective of containing inflation.
Many people feel it will give more autonomy to RBI which is in sync with the central banks of many world big economies. The agreement says, once inflation reaches beyond the comfort zone, both at high and low levels, RBI should use whatever in its command to bring it to the comfort zone. This basically gives autonomy to RBI.
RBI act will be amended for the formation of a five-member monetary policy committee (MPC) headed by the RBI governor. Out of the five members, three were suggested to be from RBI (the deputy governor and the executive director in-charge of monetary policy). This composition of committee will reflect the independence of RBI, it should have  experts as members and should not have government nominee as members.
India in past has paid price for not having clear monetary policy. So this step should improve the situation and also ease pressure on RBI to pursue a particular course of
In general, this mechanism is welcome – since it brings to India the formal accountability and transparency about future actions that is the hallmark of modern central banking but there are still few areas where RBI cannot still do much.
As, RBI targets CPI where the weight of food items is around 50% but food inflation in India is mostly dependent on non-monetary factors such as production and supply chains, rains, harvest etc. In this case, RBI may signal intent but it will not have much impact on ground and RBI will find hard to achieve inflation target.
Also, RBI do not have any control over fiscal responsibility or debt control which government breach again and again. So again, RBI can’t do much here as well. This step is a much welcome step and will definitely improve the situation in India with respect to monetary policy but we need to be cautious and government also need to contain fiscal deficit and control its debit.



2 thoughts on “Monetary Policy Framework”

  1. i think it is the best website, as notes are to the point and cover all the topics and no need to go anywhere….thanx sir,mam for this wonderful support

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