Monetary policy committee

Reserve Bank of India policy is one of the core institutions of the Indian economy and its policy changes impact every sector of the economy which is very crucial for UPSC students. This article will help you in understanding all about the monetary policy committee, its origin, functions, and the various instruments it uses to regulate the economy.


The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) in its second bi-monthly monetary policy meeting of FY24 decided to leave the repo rate unchanged at 6.5%. This reflects RBI’s persistent stance of prioritizing price control or inflation targeting.

Origin of Monetary policy committee

The monetary policy committee is formed upon the recommendation of the Urijit Patel committee formed in 2014. The key recommendation of the committee is as follow

  • Shift to consumer price index as the nominal anchor of inflation.
  • The target of inflation should be set at 4% with a band of +/- 2% around it.
  • Inflation will be the primary objective of the monetary policy committee in its policy statements.
  • Monetary policy decision-making should be vested with a monetary policy committee(MPC) with the RBI governor as chairman and the deputy governor in charge of monetary policy as vice-chairman. The term of MPC will be 3 years and like the US Federal Reserve, its minutes of meetings should be released at later dates.

Composition of Monetary policy committee

MPC is a 6 member body with 3 members from RBI and 3 outside members nominated by the government. Section 45ZB of the amended RBI Act, 1934 provides for a monetary policy committee (MPC) to be constituted by the Central Government by notification in the Official Gazette. The first such MPC was constituted on September 29, 2016. Nominated members will hold the office for 4 years. The current composition of MPC is as follows

  • Governor of the Reserve Bank of India—Chairperson, ex officio
  • Deputy Governor of the Reserve Bank of India, in charge of Monetary Policy—Member, ex officio
  • One officer of the Reserve Bank of India to be nominated by the Central Board—Member, ex officio
  •  Prof. Ashima Goyal, Professor, Indira Gandhi Institute of Development Research —Member
  • Prof. Jayanth R. Varma, Professor, Indian Institute of Management, Ahmedabad—Member
  • Dr. Shashanka Bhide, Senior Advisor, National Council of Applied Economic Research, Delhi—Member.

Functioning of Monetary policy committee

  • The MPC is required to meet at least four times a year. The quorum for the meeting of the MPC is four members.
  • Each member of the MPC has one vote, and in the event of an equality of votes, the Governor has a second or casting vote
  • Each Member of the Monetary Policy Committee writes a statement specifying the reasons for voting in favor of, or against the proposed resolution.

Instruments of monetary policy

  • Repo Rate: The interest rate at which the Reserve Bank provides liquidity under the liquidity adjustment facility (LAF) to all LAF participants against the collateral of government and other approved securities.
  • Reverse Repo Rate: The interest rate at which the Reserve Bank absorbs liquidity from banks against the collateral of eligible government securities under the LAF.
  • Bank Rate: The rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. The Bank Rate acts as the penal rate charged on banks for shortfalls in meeting their reserve requirements (cash reserve ratio and statutory liquidity ratio). The Bank Rate is published under Section 49 of the RBI Act, 1934. This rate has been aligned with the MSF rate and, changes automatically as and when the MSF rate changes alongside policy repo rate changes.
  • Cash Reserve Ratio (CRR): The average daily balance that a bank is required to maintain with the Reserve Bank as a percent of its net demand and time liabilities (NDTL) as of the last Friday of the second preceding fortnight that the Reserve Bank may notify from time to time in the Official Gazette.
  • Statutory Liquidity Ratio (SLR): Every bank shall maintain in India assets, the value of which shall not be less than such percentage of the total of its demand and time liabilities in India as on the last Friday of the second preceding fortnight, as the Reserve Bank may, by notification in the Official Gazette, specify from time to time and such assets shall be maintained as may be specified in such notification (typically in unencumbered government securities, cash and gold).
  • Standing Deposit Facility (SDF) Rate: The rate at which the Reserve Bank accepts uncollateralized deposits, on an overnight basis, from all LAF participants. The SDF is also a financial stability tool in addition to its role in liquidity management. The SDF rate is placed at 25 basis points below the policy repo rate.
  • Marginal Standing Facility (MSF) Rate: The penal rate at which banks can borrow, on an overnight basis, from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a predefined limit (2 percent). This provides a safety valve against unanticipated liquidity shocks to the banking system. The MSF rate is placed at 25 basis points above the policy repo rate.
  • Liquidity Adjustment Facility (LAF): The LAF refers to the Reserve Bank’s operations through which it injects/absorbs liquidity into/from the banking system. It consists of overnight as well as term repo/reverse repos (fixed as well as variable rates), SDF, and MSF. Apart from LAF, instruments of liquidity management include outright open market operations (OMOs), forex swaps, and market stabilization schemes (MSS).
  • Open Market Operations (OMOs): These include the outright purchase/sale of government securities by the Reserve Bank for injection/absorption of durable liquidity in the banking system.

Type of monetary policy

  • Expansionary monetary policy: it increases the aggregate demand in the economy by expanding the money supply faster than usual or lowering short-term interest rates.
  • Contractionary monetary policy: It decreases the aggregate demand in the economy by decreasing the money supply or increasing the short-term interest rates.

Monetary vs Fiscal policy

  • Monetary policy: Monetary policy is primarily concerned with the management of interest rates and the total supply of money in circulation and is generally carried out by central banks, such as the RBI in India.
  • Fiscal policy: Fiscal policy is a collective term for the taxing and spending actions of governments. In India, fiscal policy is the domain of the Ministry of Finance.

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