MPC was constituted in 2016 as a statutory body under the RBI Act to formulate monetary ppolicy in India
COMPOSITION (6 MEMBERS)
The members include
- RBI Governor - ex-officio chairperson
- RBI Deputy Governor
- One more member from RBI to be nominated by the Central Board of Directors.
- 3 other members are be appointed by the Central Government.
Term: Members of MPC hold office for a period of four years and are not eligible for re-appointment.
Meetings: The MPC is required to meet at least four times in a year.
Quorum: 4 members.
Decision: The MPC takes decision 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.
Monetary Policy Committee Framework Agreement (MFPA)
Currently the monetary policy in India is undertaken in accordance with the Monetary Policy Framework Agreement signed between GoI and the RBI in 2015. (Based upon recommendations of Urjit Patel Committee)
Statutory status: In 2016, RBI Act, 1934 was amended to give a statutory backing to Monetary Policy Framework and to set up Monetary Policy Committee.
Inflation targeting: Monetary Policy Framework provides for inflation targeting to be set by GoI every 5 years. GoI uses CPI for the purpose of inflation targeting in India.
Flexible Inflation Targeting: Inflation target is Consumer Price Index (CPI) inflation of 4% (+/- 2%) for the period from 2016 to 2021. Government has extended current inflation target of 4% with a +/-2% tolerance band for the next five years.
Failure to maintain inflation target
- Inflation in India in the nine-month period from January to September 2022 remained above the upper tolerance limit of inflation target of RBI. This was the first time when the RBI failed in its statutory obligation to maintain inflation target.
- Central government has notified following as factors that constitute failure to achieve the inflation target: Average inflation is more than the upper tolerance band (more than 6% in present inflation target) or is less than the lower tolerance band (less than 2% in present inflation target).
- If the RBI fails to meet the inflation target, it shall send a report to Central Government stating:
- Reasons for failure to achieve inflation target.
- Remedial actions proposed to be taken by RBI.
- Estimate of time period within which inflation target shall be achieved.
First Failure of MPC to Meet Inflation Target
- Under Regulation 7 of RBI MPC and Monetary Policy Process Regulations, 2016 a separate meeting of MPC is required to be scheduled as part of the normal policy process to discuss and draft the report to be sent to the government.
- Thus, RBI scheduled an extraordinary meeting of RBI on November 3, 2022 to discuss failure of inflation target.
- Although MPC is responsible for maintaining the inflation target, the report is authored by RBI. However, MPC will be consulted in the preparation of the report.
- The report is required to be sent to the government within one month from the date on which the RBI failed to meet the inflation target.
- The report has yet not been made public by the RBI.