Summary: The monetary policy committee of Reserve Bank of India, which met early last month, voted unanimously to hike rates by half a percentage point. The aim was to bring down the soaring inflation which has been above the central bank’s tolerance level for quite some time. The monetary policy committee is a six-member panel which sets the repo rate. Repo rate acts as a benchmark for all other interest rates in the economy. Out of the six members, three are external. They are appointed for a fixed four year term. Among the three internal members, one is the RBI Governor who chairs the committee. RBI’s deputy governor in charge of the monetary policy is the second internal member. The third member is one RBI official who is nominated by the central board of RBI. The executive director in charge of monetary policy is typically the third member. The three external members notified by the Centre on October 5, 2020 are Jayanth Varma, professor IIM-Ahmedabad, Ashima Goyal, professor at the Indira Gandhi Institute of Development Research and Dr Shashanka Bhide, senior advisor at the National Council of Applied Economic Research. According to the amended RBI Act, the MPC is required to meet at least four times in a year. The quorum for the meeting of the MPC is four members. Each member of the MPC has one vote, and in the event of an equality of votes, the Governor has a second or casting vote. On the 14th day, the minutes of the proceedings of the MPC are published which includes the resolution adopted by the MPC; the vote of each member on the resolution and the statement of each member on the resolution adopted. Once in every six months, the RBI is required to publish a document called the Monetary Policy Report to explain the sources of inflation and the forecast of inflation for 6-18 months ahead. The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. Price stability is a necessary precondition to sustainable growth. In May 2016, the Reserve Bank of India (RBI) Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework. The amended RBI Act also provides for the inflation target to be set by the Government of India, in consultation with the Reserve Bank, once in every five years. Accordingly, the Central Government notified 4 per cent Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016 to March 31, 2021 with the upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent. On March 31, 2021, the Central Government retained the inflation target and the tolerance band for the next 5-year period -- April 1, 2021 to March 31, 2026.
