RBI and Monetary Policy Committee

bl15newRaja_JPG_924156fThe new agreement between Government of India and Reserve bank of India (RBI) in February 2015 clearly defines the role of RBI. According to this, the main purpose of RBI is to keep inflation in check within the levels of 4% with an additional +/- 2% deviation. When inflation crosses 6%, RBI has to take strict inflation reducing measures whereas, when it is within acceptable limit, RBI can consider various other factors eg. growth etc. to formulate policy rates. In recent years, money supply has not played a significant part while the overall liquidity in the market has, in influencing policy rates set by the RBI. On the basis of this underlying role of RBI and to maintain its accountability, certain pundits are brainstorming to come up with an effective Monetary Policy Committee (MPC). It is to be noted that different countries have different composition of MPC while in some countries the entire autonomy of managing policy rates lies with the central bank. The three main proposed composition of MPC are-

  • RBI having more strength in MPC compared to external members.
  • Both RBI and external members have equal representation and the discretion lying with the RBI governor to   decide on a policy in case of a tie while voting on a policy.
  • RBI having less members compared to external members, but the governor is given a veto power.

Any of these three compositions of MPC will help to maintain the accountability of RBI while making sure that it does not infringe RBI in its primary role of curbing inflation.

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