Daily News Analysis

Monetary Policy Committee

4th June, 2021 Economy

GS PAPER III: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context: The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) having taken stock of the evolving macroeconomic and financial conditions as well as the impact of the second wave of the pandemic voted unanimously to maintain status quo, keeping the policy repo rate unchanged at 4%.

  • The MPC also decided unanimously to continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.
  • The marginal standing facility (MSF) rate and the bank rate remain unchanged at 4.25%.
  • The reverse repo rate also remains unchanged at 3.35%.
  • On the other hand, the rising trajectory of international crude prices within a broad-based surge in international commodity prices and logistics costs is worsening cost conditions.
  • Taking all factors into consideration, the RBI has now projected real GDP growth at 9.5% in FY22 [from earlier projection of 10.5%]
  • Taking into consideration all factors, CPI inflation has been projected at 5.1% during FY22


Monetary policy

  • It is the macroeconomic policy laid down by the central bank.
  • It involves management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.
  • In India, monetary policy of the Reserve Bank of India is aimed at managing the quantity of money in order to meet the requirements of different sectors of the economy and to increase the pace of economic growth.
  • The RBI implements the monetary policy through open market operations, bank rate policy, reserve system, credit control policy, moral persuasion and through many other instruments.
  • Using any of these instruments will lead to changes in the interest rate, or the money supply in the economy.
  • Monetary policy can be expansionary and contractionary in nature.
  • Increasing money supply and reducing interest rates indicate an expansionary policy. The reverse of this is a contractionary monetary policy.
  • For instance, liquidity is important for an economy to spur growth. To maintain liquidity, the RBI is dependent on the monetary policy. By purchasing bonds through open market operations, the RBI introduces money in the system and reduces the interest rate.

Monetary Policy Committee

  • It is responsible for fixing the benchmark interest rate in India.
  • The meetings of the Monetary Policy Committee are held at least 4 times a year (specifically, at least once BIMONTHLY) and it publishes its decisions after each such meeting.
  • The committee comprises six members - three officials of the Reserve Bank of India and three external members nominated by the Government of India.
  • They need to observe a "silent period" seven days before and after the rate decision for "utmost confidentiality".
  • The Governor of Reserve Bank of India is the chairperson ex officio of the committee.
  • Decisions are taken by majority with the Governor having the casting vote in case of a tie.
  • The current mandate of the committee is to maintain 4% annual inflation until 31 March 2021 with an upper tolerance of 6% and a lower tolerance of 2%