Meaning
Monetary policy refers to the set of actions and measures that a country’s central bank (such as the Reserve Bank of India) takes to control and regulate the money supply and interest rates in the economy. The primary objectives of monetary policy typically include achieving price stability, controlling inflation, and supporting sustainable economic growth. (In short, the core objective of monetary policy is growth with price stability)
Central banks implement monetary policy through various tools and mechanisms, influencing the overall availability of money and credit in the economy.
Monetary Policy Committee (MPC) and Inflation Targeting
Monetary Policy Committee
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- An RBI-appointed committee led by the then deputy governor Urjit Patel in 2014 recommended the establishment of the Monetary Policy Committee.
- The Monetary Policy Committee is responsible for maintaining the policy rate in India.
- The Reserve Bank of India Act, 1934, was amended by Finance Act (India), 2016, to constitute and give statutory backing to MPC to bring more transparency and accountability in fixing India’s monetary policy.
- The meetings of the Monetary Policy Committee are held at least four times a year (specifically, at least once a quarter) and it publishes its decisions after each such meeting.
- The committee comprises six members – three officials of the Reserve Bank of India (including the RBI Governor) and three external members nominated by the Government of India.
- The governor of the Reserve Bank of India 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.
- The monetary policy is published after every meeting with each member explaining his opinions. The committee is answerable to the government of India if the inflation exceeds the range prescribed for three consecutive quarters.
Inflation Targeting
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- To control the price rise, the Centre in 2016 gave a mandate to the RBI to keep the retail inflation at 4% with a margin of 2% on either side (i.e. 2-6%) for a five-year period ending 31st March 2021.
- The Consumer Price Index (CPI) tracks the change in retail prices of goods and services which households purchase for their daily consumption.
- The inflation targets for the period 1st April 2021 to 31st March 2026 under the Reserve Bank of India Act 1934 has been kept at the same level as was for the previous 5 years.
