MONETARY POLICY COMMITTEE (Syllabus: GS Paper 3 – Economy)

Context: Recently, the RBI's Monetary Policy Committee (MPC) maintained the benchmark policy repo rate at 6.5% for the seventh consecutive meeting, citing persistent food price pressures hindering efforts to achieve the 4% inflation target consistently.

Monetary Policy Committee (MPC)

• About: It is body created in 2016, responsible for fixing the benchmark interest rate in India.

oIts meeting are held at least four times a year (specifically, at least once a quarter) and it publishes its decisions after each such meeting.

oThe committee is answerable to the government of India if the inflation exceeds the range prescribed for three consecutive quarters.

oCurrent mandate: To maintain 4% annual inflation until 31 March 2026 with an upper tolerance of 6% and a lower tolerance of 2%.

• First proposed by: The Urjit Patel Committee.
• Set up: Under Section 45ZB of the RBI Act of 1934 by the Union government.
• Composition: It is a 6 member committee. There are in total three internal members and three external experts. The RBI Governor and Deputy Governor are also members of the MPC Committee.
• Objectives: To improve the repo rate, reverse repo rate, liquidity, etc.
• Instruments of Committee: Repo rate, Reverse Repo rate, Marginal Standing Facility (MSF), Bank Rate, Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Open Market Operations (OMOs).

Repo Rate 

• About: The Repo Rate is the interest rate at which the Reserve Bank of India (RBI) loans money to commercial banks.
• Role in Inflation Control: It serves as a tool for monetary authorities to manage inflation by influencing borrowing costs for commercial banks.
• Effect on Borrowing Behavior: During inflationary periods, increasing the repo rate discourages banks from borrowing, thus reducing the money supply and curbing inflation.