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

Context: The Reserve Bank of India's Monetary Policy Committee is expected to maintain the repo rate at 6.5%, citing concerns over rising food inflation.

Monetary Policy Committee (MPC)

• About: It was established based on the recommendation of 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: The Repo Rate is the interest rate at which the Reserve Bank of India (RBI) loans money to commercial banks.
• Reverse repo rate: Reverse repo is the inverse contract to the repo rate. The reverse repo rate is the rate at which the RBI borrows funds from the country's commercial banks.
• Relation Between Repo Rate and Inflation

o In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.

o The central bank takes the contrary position in the event of a fall in inflationary pressures. Repo and reverse repo rates form a part of the liquidity adjustment facility.