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Govt Notifies Constitution Of Monetary Policy Committee Under RBI Act

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Towards the next step in Setting the stage for next monetary policy review by the newly constituted monetary policy committee (MPC), the government on formally notified the constitution of the MPC under the Reserve Bank of India Act, 1934.

About Monetary Policy of India,

Govt Notifies Constitution Of Monetary Policy CommitteeMonetary policy is the process by which monetary authority of a country, generally a central bank controls the supply of money in the economy by its control over interest rates in order to maintain price stability and achieve high economic growth. In India, the central monetary authority is the Reserve Bank of India (RBI).

  • It is so designed as to maintain the price stability in the economy. Other objectives of the monetary policy of India, as stated by RBI, are

Price Stability

Price Stability implies promoting economic development with considerable emphasis on price stability. The centre of focus is to facilitate the environment which is favorable to the architecture that enables the developmental projects to run swiftly while also maintaining reasonable price stability.

Controlled Expansion Of Bank Credit

One of the important functions of RBI is the controlled expansion of bank credit and money supply with special attention to seasonal requirement for credit without affecting the output.

 Promotion of Fixed Investment

The aim here is to increase the productivity of investment by restraining non essential fixed investment.

Restriction of Inventories and stocks

Overfilling of stocks and products becoming outdated due to excess of stock often results in sickness of the unit. To avoid this problem the central monetary authority carries out this essential function of restricting the inventories. The main objective of this policy is to avoid over-stocking and idle money in the organization.

To Promote Efficiency

It is another essential aspect where the central banks pay a lot of attention. It tries to increase the efficiency in the financial system and tries to incorporate structural changes such as deregulating interest rates, ease operational constraints in the credit delivery system, to introduce new money market instruments etc.

Reducing the Rigidity

RBI tries to bring about the flexibilities in the operations which provide a considerable autonomy. It encourages more competitive environment and diversification. It maintains its control over financial system whenever and wherever necessary to maintain the discipline and prudence in operations of the financial system.

About MPC,

The appointments committee of the cabinet approved the names of

  1. Chetan Ghate, a professor at Indian Statistical Institute;
  2. Pami Dua, director at Delhi School of Economics (DSE); and
  3. Ravindra Dholakia, professor at the Indian Institute of Management, Ahmedabad,

As MPC members for a period of four years. The six-member MPC—the other three members are from RBI—will conduct its first monetary policy review on 4 October, Urjit Patel’s first as RBI governor.

  • The members of the committee from RBI are governor Patel, deputy governor R. Gandhi, who is also in charge of monetary policy, and executive director Michael Patra. The RBI governor will have a casting vote in case of a tie.
  • The MPC framework replaces the current system where the RBI governor and his internal team have complete control over monetary policy. While a panel advises RBI on monetary policy decisions, the central bank is under no obligation to accept them.
  • RBI is now required to publish a monetary policy report every six months, explaining the sources of inflation and the forecasts of inflation for the period between six to 18 months.
  • MPC would be entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level.
  • A committee-based approach for determining monetary policy will add a lot of value and transparency to monetary policy decisions.
  • The meetings of the monetary policy committee shall be held at least four times a year and it shall publish its decisions after each such meeting.