Related Topic in KAS Prelims Syllabus:
Economy [Paper-II]: Indian Public Finance, Recent fiscal and monetary policy issues and their impact, structure of Indian Banking and Non- Banking Financial Institutions and reforms
Monetary Policy Committee (MPC) of RBI maintained status quo on policy rates in its fifth bimonthly policy review, citing inflation concerns despite economic growth continuing to slow down.
Fifth Bimonthly Monetary Policy Statement
- Reserve Bank of India (RBI) released its fifth bi-monthly monetary policy statement for 2019-20 in which the Monetary Policy Committee (MPC) decided to keep the policy repo rate unchanged at 5.15%.
- Consequently, the Reverse Repo Rate under the LAF will remain unchanged at 4.90 per cent, and the Marginal Standing Facility (MSF) rate and the Bank Rate at 5.40 per cent.
- MPC decided to continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.
- These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.
- The committee acknowledged that growth has weakened further, adding that removing impediments to future investments is the need of the hour.
- The real GDP growth for 2019-20 has been revised downwards from 6.1 per cent in the October policy to 5.0 per cent.
- RBI also revised its inflation forecast for the second half of the current fiscal to 4.7-5.1% from 3.5-3.7%. This comes after consumer price inflation quickened to 4.62% in October 2019, breaching the 4% target for the first time since July 2018.
- Despite cutting policy rates by 135 basis points so far in 2019, new loans have seen a transmission of only 44 basis points. Thus, MPC would rather wait for the lending rate to reflect full transmission before going ahead with a rate cut.
About Monetary Policy Committee (MPC)
- Central Government amended the RBI Act in June 2016 to hand over the job of monetary policy-making in India to a newly constituted Monetary Policy Committee (MPC).
- It is a committee headed by RBI Governor, which is entrusted with the task of fixing the benchmark policy interest rate (repo rate) to contain inflation within the specified target level.
- MPC replaced the earlier system where the RBI governor, with the aid and advice of his internal team and a technical advisory committee, has complete control over monetary policy decisions.
- The first meeting of the MPC was held on October 3 and 4, 2016 in the run up to the Fourth Bi-monthly Monetary Policy Statement, 2016-17.
- The Reserve Bank’s Monetary Policy Department (MPD) assists the MPC in formulating the monetary policy.
Composition of MPC
- MPC will have six members – the RBI Governor (Chairperson), the RBI Deputy Governor in charge of monetary policy, one official nominated by the RBI Board and the remaining three members would represent the Government of India.
- The three central government nominees of the MPC appointed by the search cum selection committee will hold office for a period of four years and will not be eligible for re-appointment.
Decision Making at MPC
- The proceedings of MPC are confidential and the quorum for a meeting shall be four Members, at least one of whom shall be the Governor and in his absence, the Deputy Governor who is the Member of the MPC.
- The MPC takes decisions based on majority vote (by those who are present and voting). In case of a tie, the RBI governor will have the second or casting vote.
- The decision of the Committee would be binding on the RBI.
- As per the Act, RBI has to organise at least four meetings of the MPC in a year.