Monetary Policy Committee (MPC) in India
Monetary Policy in India
Objectives and Framework of Monetary Policy----
Thus, monetary policy in India endeavors to maintain a judicious balance between:
Operating Procedures of Monetary Policy in India
Operating procedure refer to the day to day management of monetary conditions consistent with the overall stance of monetary policy.
It is in essence the ‘nuts and bolts’ of monetary policy. It involves four activities, viz.,
As per the provisions of the RBI Act, out of the six Members of Monetary Policy Committee, three Members will be from the RBI and the other three Members of MPC will be appointed by the Central Government. In exercise of the powers conferred by section 45ZB of the Reserve Bank of India Act, 1934, the Central Government has accordingly constituted, through a Gazette Notification dated 29th Sept 2016, the Monetary Policy Committee of RBI, with the following composition, namely:-
1) Issues and Options: The liquidity adjustment facility (LAF) has emerged as the key element of the present operating procedure of monetary policy. It has generally helped in steering the desired trajectory of interest rates in response to evolving market conditions.
2) Monetary Transmission: At the heart of the operating framework is the nature of monetary transmission. The pertinent question is whether the interest rate channel of monetary transmission is working. Monetary transmission is substantially more effective in a deficit liquidity situation than in a surplus liquidity situation.
3) Policy Rate: The present LAF framework is such that the operating policy rate alternates between the repo rate and the reverse repo rate, depending on the prevailing liquidity condition. In a surplus liquidity condition, the reverse repo rate becomes the operating policy rate. In a deficit liquidity situation, the repo rate becomes the policy rate. Going by international best practices, it is unconventional to have two policy rates.
4) Bank Rate: The RBI in its tool kit has the Bank Rate which is essentially a discount rate. Under Section 49 of the RBI of India Act, the Bank Rate has been defined as “the standard rate at which it {the Reserve Bank} is prepared to buy or re-discount bills of exchange or other commercial paper eligible for purchase under this Act”.
click here to download it in pdf
MPC BY DINESH DAYMA & B.K SHARMA
Objectives and Framework of Monetary Policy----
In India, the objectives of monetary policy evolved for maintaining price stability and ensuring adequate flow of credit to the productive sectors of the economy. With progressive liberalization and increasing globalization of the economy, maintaining orderly conditions in the financial markets emerged as an additional policy objective.
The Reserve Bank of India Act, 1934 (RBI Act) has been amended by the Finance Act, 2016, to provide for a statutory and institutionalised framework for a Monetary Policy Committee, for maintaining price stability, while keeping in mind the objective of growth. The Monetary Policy Committee 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 the Monetary Policy will add lot of value and transparency to monetary policy decisions. The meetings of the Monetary Policy Committee shall be held at least 4 times a year and it shall publish its decisions after each such meeting.
The Reserve Bank of India Act, 1934 (RBI Act) has been amended by the Finance Act, 2016, to provide for a statutory and institutionalised framework for a Monetary Policy Committee, for maintaining price stability, while keeping in mind the objective of growth. The Monetary Policy Committee 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 the Monetary Policy will add lot of value and transparency to monetary policy decisions. The meetings of the Monetary Policy Committee shall be held at least 4 times a year and it shall publish its decisions after each such meeting.
Thus, monetary policy in India endeavors to maintain a judicious balance between:
- Price stability
- Economic growth
- Financial stability.
The case of price stability as the prime objective of monetary policy rests on the assumption that volatility in prices creates uncertainty in economic decision making. Rising prices affect savings adversely while they make speculative investments more attractive. The most important contribution of the financial system to an economy is its ability to augment savings and allocate resources more efficiently. A regime of rising prices, thus, clearly affects the atmosphere for the promotion of savings and allocation of investment. Furthermore, the domestic inflation rate also has a bearing on the exchange rate of the currency.
Operating procedure refer to the day to day management of monetary conditions consistent with the overall stance of monetary policy.
It is in essence the ‘nuts and bolts’ of monetary policy. It involves four activities, viz.,
- The choice of the operational target.
- The nature, extent and the frequency of different money market operations by the central bank.
- The use and width of the corridor for very short-term market interest rates.
- The manner of signaling policy intentions.
(a) The Governor of the Bank—Chairperson, ex officio;
(b) Deputy Governor of the Bank, in charge of Monetary Policy—Member, ex officio;
(c) One officer of the Bank to be nominated by the Central Board—Member, ex officio;
(d) Shri Chetan Ghate, Professor, Indian Statistical Institute (ISI) —Member
(e) Professor Pami Dua, Director, Delhi School of Economics (DSE) — Member
(f) Dr. Ravindra H. Dholakia, Professor, Indian Institute of Management (IIM), Ahmedabad— Member
The Members of the Monetary Policy Committee appointed by the Central Government shall hold office for a period of four years, with immediate effect or until further orders, whichever is earlier.
The operating procedure is explained in detail below:1) Issues and Options: The liquidity adjustment facility (LAF) has emerged as the key element of the present operating procedure of monetary policy. It has generally helped in steering the desired trajectory of interest rates in response to evolving market conditions.
2) Monetary Transmission: At the heart of the operating framework is the nature of monetary transmission. The pertinent question is whether the interest rate channel of monetary transmission is working. Monetary transmission is substantially more effective in a deficit liquidity situation than in a surplus liquidity situation.
3) Policy Rate: The present LAF framework is such that the operating policy rate alternates between the repo rate and the reverse repo rate, depending on the prevailing liquidity condition. In a surplus liquidity condition, the reverse repo rate becomes the operating policy rate. In a deficit liquidity situation, the repo rate becomes the policy rate. Going by international best practices, it is unconventional to have two policy rates.
4) Bank Rate: The RBI in its tool kit has the Bank Rate which is essentially a discount rate. Under Section 49 of the RBI of India Act, the Bank Rate has been defined as “the standard rate at which it {the Reserve Bank} is prepared to buy or re-discount bills of exchange or other commercial paper eligible for purchase under this Act”.
click here to download it in pdf
MPC BY DINESH DAYMA & B.K SHARMA
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