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Any doubts?

  1. jai kishor

    members of monetary policy committe

  2. Daljit Singh

    how mpc take decisions? unanimously or majority

    1. Pranav Pathak

      Majority with Governor’s casting vote in case of a tie. Check the news tab with this headline : “5-member panel proposed to decide monetary policy”

RBI to link base rate with MCLR from 1 April


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Base rate, MCLR

Mains level: Monetary policy procedure and effects


Improving monetary policy transmission

  1. The Reserve Bank of India (RBI) will link the base rate for loans with the marginal cost of funds-based lending rate (MCLR) from 1 April
  2. This is likely to narrow the gap between the base rate and MCLR, and benefit borrowers who are still using the base rate
  3. It is being seen as a phasing out of the base rate system

MCLR benefits

  1. The MCLR is more sensitive to monetary policy transmission and is closely linked to the actual deposit rates
  2. MCLR is calculated on the basis of incremental cost of funds, making it a more reliable benchmark rate as compared to the base rate
  3. MCLR is reviewed on a monthly basis and base rate on a quarterly basis


  1. Since April 2016, while the repo rate has been reduced by 75 basis points, State Bank of India’s base rate has come down by 65 basis points but the one-year MCLR by as much as 1.25 percentage points
  2. One basis point is one-hundredth of a percentage point


Base Rate

  1. Base rate is the minimum rate set by the Reserve Bank of India below which banks are not allowed to lend to its customers
  2. Base rate is decided in order to enhance transparency in the credit market and ensure that banks pass on the lower cost of fund to their customers


  1. MCLR actually describes the method by which the minimum interest rate for loans is determined by a bank – on the basis of marginal cost or the additional or incremental cost of arranging one more rupee to the prospective borrower
  2. The MCLR is a tenor linked internal benchmark (tenor means the amount of time left for the repayment of a loan)
  3. The MCLR comprises of the following:

    a) The marginal cost of funds which is a novel concept under the MCLR methodology comprises of Marginal cost of borrowings and return on net worth, appropriately weighed.


    b) Negative carry on account of’ Cash reserve ratio (CRR)- Negative carry on the mandatory CRR arises because the return on CRR balances is nil. Negative carry on mandatory Statutory Liquidity Ratio (SLR) balances may arise if the actual return thereon is less than the cost of funds.

    c) Operating Cost associated with providing the loan product, including cost of raising funds, but excluding those costs which are separately recovered by way of service charges.

    d) Tenor Premium- The change in tenor premium cannot be borrower specific or loan class specific. In other words, the tenor premium will be uniform for all types of loans for a given residual tenor.

  4. The MCLR methodology for fixing interest rates for advances was introduced by the Reserve Bank of India with effect from April 1, 2016

RBI monetary policy tomorrow: 3 reasons why central bank may keep rates on hold


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Monetary policy committee, repo rate, Consumer Price Index, minimum support price, Economic Survey

Mains level: Impact of various indicators on RBI’s monetary policy


Interest rate likely to remain unchanged

  1. RBI’s monetary policy committee is likely to keep interest rate unchanged noting several upside risks to inflation
  2. RBI is expected to keep the repo rate—the rate at which the central bank lends to banks—unchanged at 6%

Reasons why the central bank may keep rates on hold

  1. Inflation: Retail inflation, as measured by the Consumer Price Index (CPI), has already breached 4%, the RBI’s medium-term target, for two consecutive months
  • Rising oil prices and lingering impact of rise in house rent allowance, as part of the 7th Pay Commission, are likely to keep future inflation prints elevated
  • There might be potential impact of the budget announcement of minimum support price (MSP) of agricultural commodities on inflation

2. Oil prices: Higher oil prices have been one of the key factors contributing to the rise in inflation

  • Further rise in prices will not only impact inflation but also other indicators such as current account deficit as well as growth because India is the net importer of oil
  • According to the Economic Survey, $10 per barrel increase in the price of oil reduces growth by 0.2-0.3 percentage points

3. Bond yields: Going by the current surge in bond yields, interest rate in India is unlikely to come down anytime soon

  • Bond yields, which reflect the interest rate trajectory, have risen because of higher supply and fiscal slippage
  • The government raised fiscal deficit target for 2018-19 to 3.3% from 3%

Read point no. 2 again. Economic survey data is important and can be directly used in answers in Mains as well as in Essay. This increases your chances of scoring more in Mains.

Civilsdaily’s Advanced program for Economic Survey and Budget takes care of providing you with all such important facts and figures from last 3 years Economic survey

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[op-ed snap] The importance of inflation expectations


Mains Paper 3: Economy | Indian Economy Issues relating to planning

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: The newscard discusses the importance of the FIT and ‘inflation expectations’. No need to go through the details of the economics concepts given in the article(unless, you have economics optional).


What is New Keynesian Phillips Curve (NKPC)?

  1. It is one of the important blocks of the New Keynesian framework, has become a dominant tool to model inflation dynamics among central bankers
  2. It relates current inflation to the expected future inflation

Adoption of “flexible inflation targeting” (FIT)

  1. Many central banks around the world have adopted an inflation targeting framework, also called “flexible inflation targeting” (FIT)
    (also adopted by the RBI)
  2. For an inflation-targeting central bank, understanding the dynamics of inflation is a prerequisite to developing a perspective on what type of monetary policy is required to achieve the inflation target on a sustainable basis
  3. For inflation-targeting monetary policy, understanding the nature of inflation expectations is of paramount importance

Importance of ‘Inflation Expectations’ in monetary policy

  1. A highly credible central bank can anchor the medium to long-term inflation expectations around the target and hence disinflation occurs smoothly without much disruption to the output
  2. Also, if the inflation expectations are firmly anchored, any temporary shocks to inflation would not persist for long, thereby making the task of monetary policy easy

Importance of the NKPC

  1. The forward-looking nature of the NKPC makes it an ideal candidate to model inflation in the presence of forward-looking inflation expectations
  2. The NKPC therefore has important implications for inflation-targeting monetary policy

The International Monetary Fund’s World Economic Outlook (2013): on inflation

  1. It had a very interesting chapter titled “The Dog That Didn’t bark: Has Inflation Been Muzzled Or Was It Just sleeping?”
  2. The chapter explains how inflation in the advanced countries did not fall, even after large increases in unemployment during the great recession that ensued from the 2008 financial crisis
    Possible reasons behind this
  3. First, it was found that the relation between inflation and the economic slack has weakened over the last few years
  4. Second, credible central banks may have firmly anchored inflation expectations and contributed to keeping inflation more stable

Adoption of the FIT framework by the RBI

  1. The RBI has adopted the FIT framework with consumer price index inflation as the nominal anchor
  2. The primary objective of monetary policy is to achieve the inflation target over the medium-run with some flexibility to address growth concerns in the short-run
  3. The given flexibility is important to address the high-inflation-low-growth puzzle confronted by the Indian economy recently
  4. Even though inflation in India is susceptible to different supply shocks, firmly anchored medium- to long- run inflation expectations may generate the scope for monetary policy to stimulate growth
    (in the short-run by allowing inflation to deviate from the target)

The way forward

  1. The overall success of inflation-targeting framework depends on how credible the central bank is and how well the inflation expectations are being anchored
  2. The RBI needs to do exactly that


Phillips curve

  1. The Phillips curve is an economic concept developed by A. W. Phillips showing that inflation and unemployment have a stable and inverse relationship
  2. The theory states that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment
  3. However, the original concept has been somewhat disproven empirically due to the occurrence of stagflation in the 1970s, when there were high levels of both inflation and unemployment

What to note in RBI monetary policy beyond rate action


Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: Repo rate, Goods and services tax (GST), Consumer Price Index, Liquidity Adjustment Facility, open market operations (OMO), fiscal deficit

Mains level: factors that affect RBI’s monetary policy in short and long term


RBI’s monetary policy committee likely to leave rates unchanged

  1. This might be due to the concerns of rising inflation
  2. The key repo rate—the rate at which RBI infuses liquidity in the banking system might be kept unchanged at 6%

Growth & inflation forecast

  1. In the last policy, RBI had revised the fiscal year 2017-18 growth target down to 6.7% from 7.3%
  2. This was done citing adverse shocks, especially to the manufacturing sector, from the implementation of the goods and services tax (GST)
  3. The latest GDP growth number for the quarter ended September has inched upwards to 6.3, showing recovery
  4. Inflation, as measured by Consumer Price Index has accelerated, inching closer to the 4% mark, which is the central bank’s medium-term target
  5. CPI inflation is expected to rise in the second half of the financial year

Liquidity management

  1. Due to gradual rise in currency in circulation and pick up in credit off-take, liquidity situation is moving towards neutral from surplus mode
  2. RBI might use overnight and term repos under the Liquidity Adjustment Facility to manage liquidity in the near term
  3. Additional open market operations (OMO) seem unlikely, given the cancellation of the OMO sale last month

Government finances commentary

  1. RBI is likely to reiterate its caution regarding the impact of fiscal slippages on inflation in the coming month
  2. The government has already reached 96% of the budgeted fiscal deficit

MPC minutes spotlight risks to inflation; signal RBI may stay on ‘hold’


Mains Paper 3: Indian Economy

The following things are important from UPSC perspective:

Prelims: MPC, UPSC has asked question on MPC in 2017 Preliminary examination.

Mains: Nothing much, just the trend of inflation needs to be kept in mind.




The Recent MPC Meeting

  1. A majority of the members of the Reserve Bank of India’s (RBI) monetary policy committee flagged an increase in inflation risks.
  2. The central bank held its key policy interest rate at 6%.
  3. It also observed that a deceleration in retail inflation had been temporary as headline inflation.

How to keep headline inflation close to 4% ?

  1. It is important to recognise near and medium-term risks to the inflation outlook
  2. There is a need to be vigilant on account of uncertainties on the external and fiscal fronts; this calls for a cautious approach.

The inflation outlook for the coming months

  1. It is time to be in readiness to raise the policy rate to suppress the underlying drivers of inflation if they strengthen further
  2. CPI inflation was likely to moderate to about 3% in October.
  3. But this would be driven by food prices, while core inflation was likely to stay above 4% amid rising risks of fiscal slippage.


  1. 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.
  2. The Monetary Policy Committee is entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level.
  3. The meetings of the Monetary Policy Committee are held at least 4 times a year and it publishes its decisions after each such meeting
  4. The MPC will have six members – the RBI Governor (Chairperson), the RBI Deputy Governor in charge of monetary policy, one official nominated by the RBI Board and the remaining three members would represent the Government of India.


[op-ed snap] Space for a cut: On RBI repo rate cut

Image result for RBI repo rate cut

Image source


Mains Paper 3: Economy | Indian Economy Issues relating to planning

Once you are done reading this op-ed, you will be able to attempt the below mentioned question.

Explain the working of monetary policy committee? Why there is a pressure on the monetary policy committee to cut interest rates ?

From UPSC perspective, the following things are important:

Prelims level: Monetary policy committee, different types of inflation

 Mains level: Monetary policy committee working



  • Reserve Bank of India did cut the policy repo rate by 25 basis points, and has opted to play safe while nominally acceding to the clamour for softer lending rates. 

Bimonthly policy statement

  1. It refers to the significant slowdown over the past three months in core inflation — retail price gains excluding those for food and fuel
  2. Monsoon has so far been normal, and the initial roll-out of GST has been “smooth”.
  3. Monetary policy committee chosen to retain the “neutral” stance, given that it expects the trajectory of inflation to rise from current lows amid a welter of uncertainties

Chances for Inflation?

  1. Due to the implementation of farm loan waivers by States
  2. State governments will implement salary and allowance increases following the Centre’s implementation of the seventh pay panel-related hikes.
  3. A second successive normal monsoon that could check food costs and a stable international commodity price outlook — that could help keep the inflation trajectory favourable. 

Way forward

  1. Impulses for growth in industry and services are weakening, so the Centre and the States to take enabling steps, through policy measures and directed fiscal actions, to give a thrust for the revival of private investment
  2. It will serve nobody’s interests if the rate reduction doesn’t have “the desired amplifier effects on the economy” and ends up only temporarily masking the true problems in the banking and real sectors.


The Monetary Policy Committee (MPC)

  1. It is a committee of the Central Bank in India, headed by its Governor, which is entrusted with the task of fixing the benchmark policy interest rate (repo rate) to contain inflation within the specified target level.
  2. Monetary Policy Committee is defined in Section 2(iii)(cci) of the Reserve Bank of India Act, 1934
  3. The MPC replaces the current system where the RBI governor, with the aid and advice of his internal team and a technical advisory committee, has complete control over monetary policy decisions.

Composition of MPC

  1. Monetary Policy Committee is an executive body of 6 members. Of these, three members are from RBI while three other members are nominated by the Central Government.
  2. Each member has one vote. In case of a tie, the RBI governor has casting vote to break the tie


Centre notifies amended RBI Act for MPC

  1. News: Centre has brought the Monetary Policy Committee (MPC)  closer to reality by notifying changes made to the Reserve Bank of India (RBI) Act
  2. The rules governing the procedure for selection of members of MPC and factors constituting failure to meet inflation target have also been notified
  3. MPC: Tasked with bringing value and transparency to monetary policy decisions
  4. Frequency: MPC to meet 4 times a year and make public its decisions following each meeting
  5. Members: Total 6 members, including 3 members from RBI- the Governor (ex-officio chairperson), a Deputy Governor and an officer of the RBI
  6. The other 3 non-RBI members will be appointed on the recommendations of a search-cum-selection committee headed by the Cabinet Secretary
  7. The non-RBI members will be experts in economics, banking, finance or monetary policy
  8. They will be appointed for 4 years & will be ineligible for re-appointment

What is MCLR?

  1. Context: RBI introduced Marginal Cost based Lending Rates (MCLR) on 17 December
  2. MCLR: The new framework requires banks to set rates based on their marginal cost of funds rather than their average cost of funds
  3. Banks will need to consider their marginal cost of funds, or the cost incurred on incremental deposits across different maturities
  4. To this, banks will add their operating costs, the negative carry over of their cash reserve ratio balances with the central bank
  5. Why? To improve the transmission of cuts in policy rates to the end-borrowers.

Short-term loans get cheaper

  1. Context: Banks will start adopting the marginal cost of funds-based lending rate (MCLR) from 1 April
  2. Effect: Short-term working capital loans are set to get cheaper

RBI expected to cut rates next week

  1. Context: Survey by Reuters of 50 ecnomists showed the interest rate was likely to be cut to 6.50% at the 5 April review
  2. Findings: Falling inflation will give India’s central bank room to cut interest rates at policy review
  3. It might cut them again by September, before holding steady to assess the impact of the upcoming monsoon season on food prices
  4. Need: An accommodative monetary policy is the need of the hour with industrial and agricultural data suggesting weakness

5-member panel proposed to decide monetary policy

Ministry’s note for the Cabinet’s approval proposes a five-member Monetary Policy Committee.

  1. Government will nominate two members and the RBI three members.
  2. Each of five members have one vote and the RBI Governor, chair of the committee, will have a casting vote in the event of a tie in situations such as the absence of a member.
  3. Inflation target for the RBI in each financial year will be determined by the Government in consultation with the RBI itself.
  4. At present, the Governor is advised by a technical committee but can veto decisions, being singularly responsible for monetary policy.

Draft of Indian Financial Code, proposed a six-member monetary policy committee, besides powers for the government to appoint four of the six members.

FinMin moves Cabinet note on monetary policy committee

The RBI a very credible institution, nothing will be done in MPC that undermines the role of the RBI

  1. Cabinet note on setting up the proposed monetary policy committee (MPC), where RBI is expected to retain its dominant role.
  2. MPC to take key decisions on interest rate changes, and is decided by the central bank Governor on advice of the technical advisory committee.
  3. Government and RBI have already signed a monetary policy framework that has set an inflation target of 4 per cent.
  4. MPC comprises of Seven members, three from the RBI and three government nominees, with the RBI Governor having the casting vote.
  5. Under the current system, RBI Governor is appointed by the government, but controls monetary policy and has veto power over the existing advisory committee of RBI members.

The name is Rajan, Raghuram Rajan

Rajan can certainly justify the swagger with which he spoke at the post-policy press conference

  1. My name is Raghuram Rajan and I do what I do,” joked the RBI governor when asked whether the central bank’s outlook was hawkish while the policy statement is dovish.
  2. In one clean shot, RBI has silenced critics who were insisting that growth in the economy was being held back by the high real interest rates in the economy.
  3. RBI’s decision was driven by a number of domestic and global factors.
  4. Domestically, the enabling factors for a rate cut had been put in place, with consumer price inflation remaining in check.
  5. The ebbing of inflation in the year so far is due to a combination of low month-on-month increases in prices and favourable base effects.
  6. Growth, remains sluggish, forcing the central bank to bring down its growth projection for 2015-16 to 7.4% from the earlier forecast of 7.6%.
  7. Underlying economic activity, remains weak on account of the sustained decline in exports, rainfall deficiency and weaker-than-expected momentum in industrial production and investment activity.
  8. Keeping those two domestic factors in mind against the backdrop of a weakening global economy, Rajan appears to have taken a leap of faith and frontloaded 50 basis points in rate cuts.

Rajan announced that RBI will gradually increase the foreign investment limit in central government bonds to 5% of the outstanding stock of government securities by March 2018.

Monetary policy committee: vote or veto?

  1. Govt. and RBI have been on the same page in most of the monetary policy actions, except few.
  2. The expression of ‘high growth with moderate inflation‘ suffice the balance in a developing country.
  3. A veto is the antithesis of a vote. A vote and a veto co-exist uneasily and with unhappy consequences only in the UN Security Council.
  4. It would be unwise to say that govt. cannot be trusted to nominate qualified or independent members for MPC, in fact RBI governor is also appointed by them.

[Discuss] Can anyone elaborate on the need for RBI to be independent?

Don’t the normal principles of political accountability – govt. is accountable to people and thus will take care of growth/ inflation/ interest rate decisions in the best interests of people, apply here?


Is it just a simple matter of separation of powers? Certain bodies must be independent from government control, though independence in no way should imply lack of accountability.

Will this bring the conflict of growth and inflation to the fore? The problem is that monetary policy tools will result in growth with immediate effects. However, any policy decisions regarding inflation takes a long time for it to take effect.


Let’s have a better, more informed debate around this. Shall we?

[Discuss] RBI at the risk of losing autonomy?

RBI has always been in news for two things – the legendary Raghuram Rajan and the (infinite) committees he summons. One such committee was the Urjit Patel Committee which had suggested some reforms which have snowballed into the modern day speculation of RBI’s autonomy loss. What’s the real deal? 


FSLRC draft gives the centre the right to appoint 4 out of 7 monetary policy committee members, and takes away the veto power of RBI governor.

  1. The latest FSLRC draft gives the Union government the right to appoint 4 out of 7 MPC members.
    • FSLRC – Financial Sector Legislative Reforms Commission
    • MPC – Monetary Policy Committee
  2. It also takes away the veto power of the RBI governor even as he will have a casting vote in the event of a tie in the MPC (which can happen if one member is absent at the meeting).

Remember the 2014 Urjit Patel Committee report?

RBI deputy governor Urjit Patel had recommended a 5-member MPC with the governor as the chairman. Overly tilted in favour of RBI, this report also suggested that the governor and, in his absence the deputy governor, will have a casting vote in case of a tie, but it was not in favour of the governor enjoying the veto power.

The FSLRC draft goes ahead and places more power in the hands of the govt.



Give the RBI its independence

  1. The new draft of Indian Financial Code released by finance ministry provides for setting up of a Monetary Policy Committee (MPC) to decide policy rate.
  2. Currently, Technical Advisory Committee (TAC) advises RBI on such issues, but RBI governor has the right to veto any decision of TAC.
  3. FSLRC suggested that 7-member MPC, shall be appointed after due consultations between the govt. and the RBI, with 3 nominees from govt. and veto power for RBI governor.
  4. However, the draft seeks to vest in the govt. the power to nominate 4 members to the MPC, without any veto power to Governor.
  5. Though, it is not wrong to allow the govt. a say in the matters of monetary policy, but it appears to undermine RBI’s autonomy.

Another thorn in the love-hate relationship of Govt & RBI

  1. Govt’s proposal on the composition of the Monetary Policy Committee is diametrically opposite to that of Urjit Patel Committee’s recommendations.
  2. Patel Committee had suggested that all the members of MPC should be chosen by RBI while Govt. wants the majority in the MPC panel.
  3. Going by international norms, except in Colombia, Guatemala and the Philippines, the Govt. does not have representation in the MPC.

:( We are working on most probable questions. Do check back this section.

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