What is the monetary policy committee? How does this structural innovation convert in terms of functional aspects of monetary policy in India?

Context:

• In order to reduce the burden on RBI governor, Parliament has amended RBI Act, 1934 to set up monetary policy committee (MPC) .

About MPC

• The monetary policy committee framework will replace the current system where the RBI governor and his internal team have complete control over monetary policy decisions. While a technical advisory committee advises the RBI on monetary policy decisions, the central bank is under no obligation to accept its recommendations.
• The committee will have six members. Of the six members, the government will nominate three. The RBI Governor will chair the committee. The governor, however, will not enjoy a veto power to overrule the other panel members, but will have a casting vote in case of a tie. No government official will be nominated to the MPC.
• The other three members would be from the RBI with the governor being the ex-officio chairperson.
• The MPC will set interest rates to keep retail inflation within targets. Inflation targets will be set once every five years.

Importance:

• Diversity of views, specialised experience and independence of opinion.
• Footprint of global most global central banks.
• Heightened public interest and scrutiny of MP decisions and outcomes has propelled a worldwide movement towards a committee based approach to decision making with a view to bringing in greater transparency and accountability in India.

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