Introduction
The Reserve Bank of India (RBI) manages the country's monetary policy to ensure price stability while supporting economic growth. This framework is a core topic for UPSC Prelims, particularly concerning the functions of the Monetary Policy Committee (MPC) and the mechanisms of inflation targeting.
Why in News?
- The Monetary Policy Committee (MPC) is conducting its periodic policy review to evaluate inflationary pressures and economic growth trends.
- Discussions focus on whether to maintain the current repo rate or adjust it in response to volatile food inflation and global supply chain disruptions.
Static Link
- The Monetary Policy Framework in India is anchored by the RBI Act, 1934.
- The government mandates a flexible inflation targeting framework: 4 percent with a tolerance band of +/- 2 percent.
- UPSC often asks about the mandate of the RBI and the role of benchmark interest rates in controlling money supply and inflation.
Institutional Link
- The Monetary Policy Committee (MPC) is a statutory body established under the RBI Act, 1934.
- It comprises six members: three from the RBI (including the Governor) and three appointed by the Central Government.
- The RBI Governor serves as the ex-officio Chairperson of the MPC.
- The committee is responsible for deciding the policy repo rate to achieve the inflation target.
Core Prelims Facts
- Inflation Target: Fixed at 4 percent (with a tolerance band of 2 percent to 6 percent).
- Review Cycle: The government reviews the inflation target every five years.
- Primary Tool: The Repo Rate is the main instrument for liquidity management and influencing the inter-bank call money market.
- Transparency: The MPC is required to publish the minutes of its meetings after 14 days.
Important Terms and Concepts
- Repo Rate: The rate at which the RBI lends money to commercial banks against government securities.
- Headline Inflation: Measured by the Consumer Price Index (CPI), it includes all categories of goods and services, including food and fuel.
- Liquidity Adjustment Facility (LAF): A tool used by the RBI to manage daily liquidity in the banking system through repo and reverse repo operations.
- Open Market Operations (OMO): The purchase and sale of government securities by the RBI to regulate the money supply in the economy.
Bodies / Organisations / Institutions
- Monetary Policy Committee (MPC): Statutory body responsible for benchmark interest rate decisions.
- Reserve Bank of India (RBI): India's central bank, regulating monetary policy and the banking system under the RBI Act, 1934.
Possible UPSC Prelims Traps
- Composition Trap: It is not a purely RBI-dominated body; three members are government appointees.
- Statutory Status: The MPC is a statutory body, not a constitutional one.
- Mandate Trap: The RBI's primary objective is price stability while keeping in mind the growth objective.
- Policy Confusion: The MPC decides the repo rate, but the Government of India decides the inflation target (though in consultation with the RBI).
One-Minute Revision Notes
- MPC consists of 6 members (3 RBI, 3 Government).
- RBI Governor is the Chairperson of the MPC.
- Inflation target is 4 percent (+/- 2 percent).
- Repo rate is the primary tool for inflation control.
- MPC is a statutory body under the RBI Act.
Practice MCQ for Prelims
1. With reference to the Monetary Policy Committee (MPC) in India, consider the following statements:
1. It is a statutory body constituted under the RBI Act, 1934.
2. The Governor of the Reserve Bank of India is the ex-officio Chairperson of the committee.
3. The committee is mandated to decide the policy repo rate to achieve the inflation target set by the government.
Which of the statements given above is/are correct?
A) 1 and 2 only
B) 2 and 3 only
C) 1 and 3 only
D) 1, 2 and 3
Answer: D
Explanation: All the statements are correct. The MPC is a statutory body under the RBI Act, chaired by the RBI Governor, and has a mandate to maintain price stability by setting the repo rate according to the government-mandated inflation target.
Original Article: https://indianexpress.com/article/explained/explained-economics/rbi-rate-hike-probability-inflation-growth-forecast-10716518/
Full Current Affairs Analysis: https://iasment.com/understanding-rbi-monetary-policy-stance-amidst-inflationary-trends-mains-specific/