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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”

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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