Monetary Policy Committee – Functions, Objectives of MPC

By Balaji

Updated on: February 17th, 2023

The Monetary Policy Committee (MPC) is a committee set up by the Union Government and led by the Reserve Bank of India (RBI). In the initial days, the Governor of RBI was taking all the major decisions related to interest rates before the establishment of the Monetary Policy Committee. In the latest news, the RBI Monetary Policy Committee indicated that the accommodative policy of the central government might fail to follow the inflation target of 6%.

The MPC beholds major functions in modulating the interest rates and ensure the stability of the economy. Urjit Patel’s recommendations played an eminent role in instituting the Monetary Policy Committee. This topic is part of the IAS Syllabus and hence, the aspirants must be aware of its functions, structure, significance, members, and other details of the committee.

Table of content

  • 1. What Is Monetary Policy Committee? (more)
  • 2. Origin Of MPC (more)
  • 3. Monetary Policy Committee Members (more)
  • 4. Objectives Of Monetary Policy Committee [MPC] (more)
  • 5. Functions Of Monetary Policy Committee (more)
  • 6. Instruments Of Monetary Policy Committee [MPC] (more)
  • 7. Significance of MPC (more)
  • 8. Monetary Policy Committee UPSC (more)

What Is Monetary Policy Committee?

The RBI Monetary Policy Committee (MPC) is a statutory body constituted as per Section 45ZB under the RBI Act of 1934 by the Central Government. It is a remarkable initiative by the Reserve Bank of India to surge the GDP growth and turn down the percentage of inflation in India.

  • It was brought as an initiative to bring accountability and transparency in fixing the Monetary Policy of India.
  • It was formed with the objective of fixing the benchmark policy interest rate (repo rate) in order to keep inflation within a particular target level.
  • RBI governor is in the charge of taking monetary policy decisions with the advice and recommendations of the technical advisory committee and internal team.

Origin Of MPC

The RBI Monetary Policy Committee (MPC) was established based on the recommendation of the Urjit Patel Committee. They initially proposed the idea for the formation of a five-member Monetary Policy Committee -three members from the RBI and two nominated by the Government. Later The Government suggested a seven-member committee. Further negotiations resulted in the present composition with 6 members.

  • The Monetary Policy Committee (MPC) was set up under Section 45ZB of the RBI Act of 1934 by the Union government.
  • The first meeting of MPC was conducted on 3rd October 2016 in Mumbai.
  • With the adoption of the Monetary Policy Committee (MPC) in 2016, the monetary policy decision-making process in India has undergone a transformation. From Governor-centric decision-making to entrusting this responsibility to a collegial Monetary Policy Committee (MPC), India has made a transition that brings more transparency and accountability to fixing the Monetary Policy of India.

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Monetary Policy Committee Members

The RBI Monetary Policy Committee (MPC) 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. Check the list here of all the members that will provide ideation of the structure of the Monetary Policy Committee.

It consists of three internal members – the Governor as the Chairperson, ex officio; the Deputy Governor in charge of monetary policy as Member, ex officio; and one officer of the Bank to be nominated by the Central Board as Member ex-officio – and three external experts appointed by the Central Government.

Following are the members of MPC RBI

  • RBI Governor as its ex officio chairperson.
  • Deputy Governor in charge of monetary policy, member ex officio
  • An officer of the Bank to be nominated by the Central Board as member ex officio
  • Three persons are to be appointed by the central government.
    • Appointments of this category must be from “persons of ability, integrity, and standing, having knowledge and experience in the field of economics or banking or finance or monetary policy

Current 6 Members of the Monetary Policy Committee

The MPC RBI includes 6 members currently namely-

  • Shaktikanta Das (Governor of RBI)
  • Michael Debabrata Patra (Deputy Governor)
  • Rajiv Ranjan
  • Jayanth R. Varma,
  • Ashima Goyal-
  • Shashanka Bhide-

Objectives Of Monetary Policy Committee [MPC]

The Monetary Policy Committee is an initiative to improve the repo rate, reverse repo rate, liquidity etc. The RBI Monetary Policy Committee determines the policy interest rate in order to achieve the following objectives.

  1. Provide reasonable price stability.
  2. Stabilize the business cycle.
  3. Provide faster economic growth.
  4. Exchange Rate Stability.
  5. Generate employment.

Functions Of Monetary Policy Committee

The main objectives and functions of monetary policy committee are to maintain a balance in the business cycle, to surge the rate of GDP and economic growth, and to turn down the witnessed inflation rates. The Monetary Policy Committee and its functions are as follows:

  • The Monetary Policy Committee(MPC) is required to meet at least four times a year.
  • The quorum required for the meeting of the MPC is four members.
  • Each member of the MPC has one vote, and in the event of an equality of votes, the Governor has a second or casting vote.
  • Once every six months, the Reserve Bank is required to publish a document called the Monetary Policy Report.

Instruments Of Monetary Policy Committee [MPC]

There are two types of monetary policy instruments: qualitative instruments and quantitative instruments. The numerous instruments of the monetary policy committee assist it in achieving the requisite objectives. The candidates must have complete knowledge of the objectives and tools of monetary policy.

  • Quantitative instruments: Repo rate, Reverse Repo rate, Marginal Standing Facility (MSF), Bank Rate, Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Open Market Operations (OMOs)
  • Qualitative Instruments: Direct action, change in the margin money, and moral suasion.

By managing the Monetary Policy, the monetary authority of the country regulates the supply of money in an economy and influences macroeconomic factors.

  • The Monetary Policy adjusts interest rates to sustain price stability and to maintain the predictable foreign exchange rates
  • The Reserve Bank of India is the country’s central banking authority. It is in charge of monetary policy in accordance with the government’s development goals.
  • Monetary policy can be either contractionary or expansionary. A policy that increases the supply of money in the economy is called expansionary monetary policy, and a policy that decreases the supply of money is called contractionary policy.

Significance of MPC

The monetary policy committee holds the authority of governing the money suppky and economy in the country. It also formulates major decisions about the financial matters and economy of the country.

  • The stability in the price of the existing commodities is also governed by the MPC.
  • The Reserve Bank of India has been entitled and endowed with the responsibility of establishing monetary policies by the provisions of the Indian Constitution.
  • The section 45ZB gurantees the right of formulating monetary policies to the Reserve Bank of India.
  • The contractionary and expansionary forms of monetary policies are usually observed.
  • The monetary policy committee takes charge of the monetary policies.

Monetary Policy Committee UPSC

As we have mentioned above, Monetary Policy Committee is part of UPSC syllabus, and all the candidates preparing for the exam must have in-depth knowledge of the Monetary Policy Committee. Understanding the MPC would also help IAS exam aspirants deal with other Indian Economy sections.

Monetary Policy Committee is a part of the Indian Economy and questions from this section can be asked in both prelims and mains. Apart from counting on the notes candidates need to follow the right UPSC Books as well.

Other Important UPSC Notes
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Charter Act 1813 Notes for IAS Exam Charter Act 1853 UPSC Notes
Biosphere Reserves in India Notes for UPSC Exam UPSC Notes – Morley minto Reforms
Revolt of 1857 Notes for UPSC Structure of Atmosphere UPSC Notes
Regulating Act of 1773 UPSC Polity Notes Ryotwari System UPSC Notes
Charter Act 1833 UPSC Notes Mahalwari System Notes for UPSC Exam
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