Monetary Policy Committee

The Monetary Policy Committee (MPC) is a statutory body constituted under Section 45ZB of the Reserve Bank of India Act, 1934, as amended by the Finance Act, 2016, which gave legal force to the inflation-targeting framework recommended by the Urjit Patel Committee report of 2014. The MPC is entrusted with the sole task of determining the policy repo rate required to achieve the inflation target notified by the Central Government in consultation with the RBI. Under Section 45ZA, this target is set once every five years; for the period August 2016 to March 2021 and again to March 2026 it was fixed at 4% Consumer Price Index (CPI) inflation, with a tolerance band of +/- 2 percentage points (i.e. 2% to 6%). The MPC thus replaced the earlier discretionary, RBI-Governor-centric system of monetary decision-making with a committee-based, accountable and inflation-anchored regime.

The committee comprises six members: three from the RBI — the Governor (ex-officio Chairperson), the Deputy Governor in charge of monetary policy, and one officer of the Bank nominated by the Central Board — and three external members appointed by the Central Government on the recommendation of a Search-cum-Selection Committee headed by the Cabinet Secretary. External members hold office for four years and are not eligible for re-appointment. Each member has one vote, and in the event of a tie the Governor exercises a casting (second) vote under Section 45ZI. The MPC must meet at least four times a year (in practice six times), and the quorum is four members. Decisions are taken by majority and, crucially, the minutes — including the resolution, the voting pattern and each member's statement — are published within fourteen days, ensuring transparency.

A central accountability feature is the failure clause: under Section 45ZN, if average inflation breaches the tolerance band for three consecutive quarters, the RBI is deemed to have failed and must submit a report to the Central Government explaining the reasons, the remedial actions, and the estimated time to return to target. This was invoked in 2022, when the RBI sent such a report to the government after CPI inflation stayed above 6% through the first three quarters of the calendar year, driven by post-pandemic and Ukraine-war supply shocks. The instruments the MPC's rate decisions operate through include the repo rate, reverse repo, the Standing Deposit Facility (introduced April 2022), the Marginal Standing Facility and the Liquidity Adjustment Facility. The first MPC was constituted in September 2016 and delivered its inaugural resolution on 4 October 2016, cutting the repo rate to 6.25%.

For UPSC, the MPC is a high-frequency topic in the General Studies Paper III (economy) and Prelims, where questions test its composition (3+3), the appointing authorities, the statutory basis (RBI Act sections via the Finance Act 2016), the inflation target and band, the casting-vote rule, and the failure-report mechanism. A common distractor is confusing external-member appointment (by the Government) with the Governor's appointment, or misstating the band as 4-6% rather than 2-6%. Candidates should also link the MPC to the FRBM Review (N.K. Singh) Committee and the broader shift from multiple-indicator to flexible inflation targeting.