Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC)? 1. It decides the RBI's benchmark interest rates. 2. It is a 12-member body including the Governor of RBI and is reconstituted every year. 3. It functions under the chairmanship of the Union Finance Minister. Select the correct answer using the code given below:
1 only
Understanding the Monetary Policy Committee (MPC)
The Monetary Policy Committee (MPC) is a key body in India responsible for formulating monetary policy. Its main objective is to maintain price stability while keeping in mind the objective of growth. Let's analyze each statement provided regarding the Monetary Policy Committee (MPC).
Analysis of Statement 1: Deciding RBI's Benchmark Interest Rates
Statement 1 says that the Monetary Policy Committee (MPC) decides the RBI's benchmark interest rates. This statement is correct. The primary function assigned to the MPC is to fix the policy repo rate. The policy repo rate is the key benchmark interest rate that the Reserve Bank of India (RBI) uses as a tool to control inflation and manage liquidity in the economy. By changing this rate, the MPC influences other interest rates in the banking system, thereby impacting borrowing and lending decisions and ultimately economic activity.
Analysis of Statement 2: Composition and Reconstitution of MPC
Statement 2 claims the Monetary Policy Committee (MPC) is a 12-member body including the Governor of RBI and is reconstituted every year. Let's break this down:
- Membership: The MPC consists of 6 members, not 12.
- Composition: Three members are from the Reserve Bank of India (RBI), which include the Governor (as chairperson), the Deputy Governor of RBI in charge of monetary policy, and one officer of RBI nominated by the Central Board. The other three members are appointed by the Central Government.
- Reconstitution: The members appointed by the Central Government hold office for a period of four years and are not eligible for re-appointment. The committee is not reconstituted every year.
Therefore, statement 2 is incorrect regarding both the number of members and the frequency of reconstitution.
Analysis of Statement 3: Chairmanship of MPC
Statement 3 states that the Monetary Policy Committee (MPC) functions under the chairmanship of the Union Finance Minister. This statement is incorrect. The Monetary Policy Committee (MPC) is chaired by the Governor of the Reserve Bank of India (RBI). The Union Finance Minister is part of the government, while the MPC is a committee within the RBI framework responsible for independent monetary policy decisions.
Conclusion
Based on the analysis:
- Statement 1 is correct.
- Statement 2 is incorrect.
- Statement 3 is incorrect.
Only statement 1 is correct among the given options.
Revision Table: Key Facts about Monetary Policy Committee (MPC)
| Aspect | Details |
|---|---|
| Objective | Maintain price stability, considering growth |
| Total Members | 6 |
| RBI Members | 3 (Governor, Deputy Governor, nominated RBI officer) |
| Government Nominees | 3 |
| Chairperson | RBI Governor |
| Key Function | Fixing the policy repo rate |
| Government Nominee Term | 4 years (not eligible for re-appointment) |
Additional Information: Monetary Policy Framework
The establishment of the Monetary Policy Committee (MPC) in India was a step towards formalizing the inflation targeting framework. The objective set by the Government of India, in consultation with the RBI, is typically to maintain consumer price index (CPI) inflation within a target range (currently 4% with a band of $\pm 2\%$). The MPC is mandated to meet at least four times a year. The decisions are taken by majority vote, with the Governor having a casting vote in case of a tie. The minutes of the MPC meetings, including the vote of each member, are published within a stipulated time frame.
Other tools used by the RBI as part of its monetary policy include the cash reserve ratio (CRR), statutory liquidity ratio (SLR), bank rate, marginal standing facility (MSF), and open market operations (OMOs).
Important Questions from RBI
The terms ‘Marginal Standing Facility Rate’ and ‘Net Demand and Time Liabilities’, sometimes appearing in news, are used in relation to
In the context of Indian economy; which of the following is/are the purpose/purposes of ‘Statutory Reserve Requirements’?
(1) To enable the Central Bank to control the amount of advances the banks can create
(2) To make the people’s deposits with banks safe and liquid
(3) To prevent commercial banks from making excessive profits
(4) To force the banks to have sufficient vault cash to meet their day-to-day requirements
Select the correct answer using the code given below.
If the interest rate is decreased in an economy, it will
The lowering of Bank Rate by the Reserve Bank of India leads to:
The Reserve Bank of India regulates the commercial banks in matters of
1. liquidity of assets
2. branch expansion
3. merger of banks
4. winding-up of banks
Select the correct answer using the codes given below:
