Context: The Reserve Bank of India (RBI) postponed the scheduled bi-monthly meeting of the Monetary Policy Committee (MPC) after the government failed to nominate its three members to the six-member panel on time.

More on news:

  • The four-year tenure of the three government-nominated members had expired after the previous policy on August 6. 
  • RBI had sought an extension of the tenure of external members due to the Covid situation
  • It was not accepted by the government as there was no provision for extension in the RBI Act.

Monetary Policy Committee (MPC)

  • The MPC is a statutory committee that fixes the key policy interest rates and monetary policy stance of the country as well as the inflation target.
  • Members: 
    • The MPC comprises three external members and three members from the RBI. 
    • The RBI Governor heads the MPC.
    • If there’s a tie on any proposal, the RBI Governor holds the casting vote.
  • Statutory status:
    • In 2016, the government had provided statutory backing to the MPC by notifying amendments to the RBI Act, 1934.
    • It also provided a statutory basis for the implementation of the flexible inflation targeting framework.
    • Prior to October 2016, the RBI Governor used to decide on policy rate.
    • Accordingly, the Central Government has notified 4 percent (+/- 2%) Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016 to March 31, 2021.

What is RBI’s Monetary Policy?

  • Monetary policy is the macroeconomic policy laid down by the Reserve Bank of India. 
  • It involves the management of money supply and interest rates
  • The central bank tweaks interest rates to achieve macroeconomic objectives such as liquidity, consumption and inflation.
  • Legal framework: The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary policy, explicitly mandated under the Reserve Bank of India Act, 1934.

The goal(s) of monetary policy:

  • The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. Price stability is a necessary precondition to sustainable growth.

Image source: Indian Express