- The Monetary Policy Committee (MPC) is a committee of the RBI which is entrusted with the task of fixing the benchmark policy interest rate (repo rate) to contain inflation within the specified target level.
- The 2016 amendment of the Reserve Bank of India Act, 1934 provides for a statutory and institutionalised framework for the MPC.
- The MPC has six members
- RBI Governor (Chairperson), RBI Deputy Governor in charge of monetary policy, one official nominated by the RBI Board and remaining 3 members would represent the Government.
- The MPC makes decisions based on majority vote. In case of a tie, the RBI governor will have a second or casting vote.
Why in News?
- The RBI’s Monetary Policy Committee (MPC) has kept policy interest rates (Repo rate) unchanged and by a 5-1 majority voted to continue the ‘accommodative’ stance as long as necessary to revive and sustain growth on a durable basis while ensuring that inflation remains within the target going forward.
- The Reserve Bank of India has raised the policy repo rate by 40 basis points (bps) to 4.4% and the Cash Reserve Ratio (CRR) by 50 basis points to 4.5%. Despite the rate increase, the RBI would maintain its ‘accommodative’ stance.
- Consequently, the standing deposit facility (SDF) rate stands adjusted to 4.15% and the marginal standing facility (MSF) rate and the Bank Rate to 4.65%.
- These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%.
Repo Rate & Reverse Repo Rate
- Repo rate is the rate of interest which is applied by RBI to commercial banks when the latter borrows from RBI. Reverse Repo rate is the rate at which RBI borrows money from commercial banks by lending securities.
- Both the Repo rate and Reverse Repo rate are used to control inflation and money supply in the economy.
- In the event of rising inflation, the RBI increases the repo rate which will act as a disincentive for banks to borrow from the central bank.
- This ultimately reduces the money supply in the economy and thus helps in arresting inflation. Similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.
Monetary policy stance
- The Central Banks use different terms to indicate its monetary policy stance on deciding policy rates like repo rate.
- “Accommodative” indicates that the central bank is telling the market to expect a rate cut anytime, “neutral” means that RBI could either increase or reduce repo rates as per liquidity conditions, “calibrated tightening” means that a cut in the repo rate is unlikely in the current rate cycle.