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Monetary Policy Committee

 What is Monetary Policy Committee (MPC)?

  • Under Section 45ZB of the amended (in 2016) RBI Act, 1934, the central government is empowered to constitute a six-member Monetary Policy Committee (MPC).

  • Objective: Section 45ZB lays down that “the Monetary Policy Committee shall determine the Policy Rate (including MSF, Repo Rate, Reverse Repo Rate, and Liquidity Adjustment Facility.) required to achieve the inflation target”.

  • The decision of the Monetary Policy Committee shall be binding on the Bank.


What is Monetary Policy Committee (MPC)?

  • The committee need to observe a "silent period" seven days before and after the rate decision for "utmost confidentiality". 

  • The current mandate of the committee is to maintain 4% annual inflation until 31 March 2026 with an upper tolerance of 6% and a lower tolerance of 2%

  • The committee is answerable to the Central Govt. if the inflation exceeds the range prescribed for three consecutive quarters.



What is Monetary Policy Committee (MPC)?

Composition:

  • The committee comprises six members.

    • Three officials of the Reserve Bank of India and

    • Three external members nominated by the government of India. 

  • The governor of the RBI is the chairperson ex officio of the committee.

  • Decisions are taken by majority with the governor having the casting vote in case of a tie.



What is repo rate?

  • It is the rate at which banks borrow from RBI on a short-term basis against a repurchase agreement. 

  • Under this policy, banks are required to provide government securities as collateral and later buy them back after a predefined time.

  • It is a part of the Liquidity Adjustment Facility (LAF) of the RBI.

  • The increased repo rate will discourage banks to borrow from the RBI and lending to the customers. 

  • This in turn will reduce the liquidity and demand in the market. It is part of the contractionary monetary policy.


Repo rate and Inflation 

  • During periods of high inflation, the RBI makes concerted efforts to reduce the flow of money in the economy.

  • The Repo rate is used as a tool to control inflation by increasing the repo rate.

  • When repo rates increased, borrowing becomes more expensive for businesses and industries as a result, slowing investment and money supply in the market.

  • As a result, it has a negative impact on economic growth, which aids in the control of inflation.


Recently in news 

  • The MPC decided unanimously on Thursday to keep the policy repo rate unchanged at 6.50%.

  • The RBI forecast real GDP growth for 2023-24 at 6.5%, and projected CPI inflation for the current fiscal year to average 5.1%.

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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: Monetary Policy Committee
Monetary Policy Committee
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