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Monetary Policy Committee


The primary goal of the RBI's monetary policy is to maintain price stability while also pursuing growth. Price stability is a prerequisite for long-term growth.

Section 45ZB of the amended RBI Act of 1934 empowers the central government to form a six-member Monetary Policy Committee (MPC) to determine the policy interest rate needed to achieve the inflation target.

As per Section 45ZB, "the Monetary Policy Committee shall determine the Policy Rate required to achieve the inflation target," and "the Monetary Policy Committee's decision shall be binding on the Bank."

The MPC shall be composed of the RBI Governor as its ex officio chairperson, the Deputy Governor in charge of monetary policy, an officer of the Bank nominated by the Central Board, and three persons appointed by the central government. The final category of appointments must come from "people of ability, integrity, and standing who have knowledge and experience in the fields of economics, banking, finance, or monetary policy." 45ZC (Section 45ZC)

The amended RBI Act, 1934 also provides for the inflation target (4%+-2%) to be set by the Government of India, in consultation with the Reserve Bank, once in every five years.

The MPC must meet at least four times per year. The MPC meeting requires a quorum of four members. Each MPC member has one vote, and in the case of a tie, the Governor has a second or casting vote.

The Monetary Policy Committee (MPC) uses CPI data to control inflation. In April 2014, the Reserve Bank of India (RBI) had adopted the CPI as its key measure of inflation.

Various Policy Stances of RBI

Accomodative Stance

An accommodative stance indicates that the central bank is willing to expand the money supply in order to boost economic growth. During an accommodative policy period, the central bank is willing to lower interest rates. A rate increase is ruled out. When growth requires policy support but inflation is not an immediate concern, the central bank typically adopts an accommodative policy.

Neutral Stance

A 'neutral stance' implies that the central bank can either cut or raise interest rates. When the policy priority is equal between inflation and growth, this stance is typically taken. The guidance indicates that the market can anticipate rate action in either direction at any time.

Hawkish Stance

A hawkish stance indicates that the central bank's primary goal is to keep inflation low. During such a period, the central bank is willing to raise interest rates in order to limit money supply and thus reduce demand. A hawkish policy also implies a tightening of monetary policy. When the central bank raises interest rates or tightens monetary policy, banks raise interest rates on loans to disincentivvise borrowers, which reduces demand in the financial system.

Calibrated tightening

Another term frequently used by the central bank is calibrated tightening. Calibrated tightening implies that a repo rate cut is not on the table during the current rate cycle. The rate hike, on the other hand, will be gradual. This means the central bank may not go for a rate increase in every policy meeting but the overall policy stance is tilted towards a rate hike. If the situation calls for it, this can happen outside of policy meetings as well.

Instruments of Monetary Policy

There are several direct and indirect instruments that are used for implementing monetary policy.

  • Repo Rate: The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of government and other approved securities under the liquidity adjustment facility (LAF).

  • Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.

  • Liquidity Adjustment Facility (LAF): The LAF consists of overnight as well as term repo auctions. Progressively, the Reserve Bank has increased the proportion of liquidity injected under fine-tuning variable rate repo auctions of range of tenors. The aim of term repo is to help develop the inter-bank term money market, which in turn can set market based benchmarks for pricing of loans and deposits, and hence improve transmission of monetary policy. The Reserve Bank also conducts variable interest rate reverse repo auctions, as necessitated under the market conditions.

  • Marginal Standing Facility (MSF): A facility under which scheduled commercial banks can borrow additional amount of overnight money from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest. This provides a safety valve against unanticipated liquidity shocks to the banking system.

  • Corridor: The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate.

  • Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. The Bank Rate is published under Section 49 of the Reserve Bank of India Act, 1934. This rate has been aligned to the MSF rate and, therefore, changes automatically as and when the MSF rate changes alongside policy repo rate changes.

  • Cash Reserve Ratio (CRR): The average daily balance that a bank is required to maintain with the Reserve Bank as a share of such per cent of its Net demand and time liabilities (NDTL) that the Reserve Bank may notify from time to time in the Gazette of India.

  • Statutory Liquidity Ratio (SLR): The share of NDTL that a bank is required to maintain in safe and liquid assets, such as, unencumbered government securities, cash and gold. Changes in SLR often influence the availability of resources in the banking system for lending to the private sector.

  • Open Market Operations (OMOs): These include both, outright purchase and sale of government securities, for injection and absorption of durable liquidity, respectively.

  • Market Stabilisation Scheme (MSS): This instrument for monetary management was introduced in 2004. Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through sale of short-dated government securities and treasury bills. The cash so mobilised is held in a separate government account with the Reserve Bank.


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