Sep 7, 2025
15
mins read
The Monetary Policy Committee is a statutory body of the Reserve Bank of India (RBI), India’s central bank, tasked with setting the policy repo rate and framing monetary policy to achieve macroeconomic objectives. Established in 2016 via an amendment to the RBI Act, the MPC’s mandate is to maintain price stability while supporting growth. In practice, this means targeting a Consumer Price Index (CPI) inflation rate of 4% ± 2% (set by the Government of India). The MPC meets regularly (at least four times a year) to review the economy and set the policy stance. Its decisions (by majority vote) directly affect lending rates, liquidity and financial markets. For UPSC aspirants, understanding the MPC’s composition, tools and impact is key for GS-III (Indian Economy) topics.
Some of the major provisions with reference to the MPC are:
The Committee is to meet at least 4 times a year.
The Committee will have 6 members.
The members of MPC shall hold office for a period of 4 years and shall not be eligible for re-appointment.
The quorum for a meeting of the MPC is 4 members.
The RBI Governor will have a casting vote in case of a tie.
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In its latest meeting (Aug 4–6, 2025), India’s six-member MPC kept the repo rate unchanged at 5.50% and maintained a neutral policy stance. This decision reflects easing CPI inflation (around 2.1% in June 2025) and strong growth. The MPC also lowered its 2025‑26 inflation forecast to ~3.1%, underscoring that price pressures are expected to remain subdued.
RBI Governor Sanjay Malhotra noted that global risks (e.g. U.S. tariffs) are being monitored but would have “not a major impact” on domestic inflation. This recent meeting highlights the MPC’s role in balancing price stability and growth.
Table of content
Established in 2016:
The MPC was constituted under Section 45ZB of the Reserve Bank of India Act, 1934 (amended by the Finance Act 2016) to bring transparency and shared responsibility in interest-rate decisions.
Previously, the RBI Governor alone set rates. The first MPC meeting was held on October 3–6, 2016.
Six members (3+3):
MPC has 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.
The external members hold office for a period of four years.
The ex-officio Chairperson is the RBI Governor. The other two RBI nominees are the Deputy Governor in charge of monetary policy and one Executive Director (nominated by the RBI Board).
The Government-appointed members are external experts (e.g. economists, bankers) selected through a search process. All members serve four-year terms.
Decision-making:
MPC decisions are made by majority vote. In case of a tie, the RBI Governor has a casting vote (ensuring decisions pass).
The quorum for a meeting shall be four Members, at least one of whom shall be the Governor and, in his absence, the Deputy Governor, who is the Member of the MPC.
Once decided, the policy rate is binding on the RBI. Minutes of each meeting (detailing votes and deliberations) must be published within 14 days, enhancing accountability.
Primary objective - price stability:
The MPC’s foremost mandate is to achieve the CPI inflation target of 4% (±2%).
Section 45ZB of the RBI Act explicitly instructs the Monetary Policy Committee to determine the policy rate needed to meet this target.
The MPC is entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level.
Growth support:
Alongside price stability, the Monetary Policy Committee must “support economic growth” in the medium term.
Thus it balances the trade-off between reining in inflation and allowing enough liquidity for economic expansion.
Setting the policy stance:
The Monetary Policy Committee reviews factors like GDP growth, global trends, fiscal policy and financial stability at each meeting.
It then sets the monetary policy stance (e.g. accommodative/neutral/tight) and announces any rate change. Changes in the repo rate influence borrowing costs across the economy (affecting loans, savings, investment).
Transparency & communication:
The MPC publishes a statement after each meeting, explaining its decision.
A detailed Monetary Policy Report (MPR) is issued twice a year (February and August), outlining economic assessment and forecasts.
These communications ensure markets and the public understand RBI’s framework and targets.
Quantitative Tools (General Instruments)
Cash Reserve Ratio (CRR): Commercial banks must keep a specified percentage of their liabilities as cash with the RBI, controlling liquidity.
Statutory Liquidity Ratio (SLR): Banks are required to hold a fixed portion of deposits in liquid forms (cash, gold, government securities).
Open Market Operations (OMO): RBI buys or sells government securities to manage money supply.
Repo Rate / Reverse Repo Rate under the Liquidity Adjustment Facility (LAF):
Repo Rate: The rate at which RBI lends short-term funds to banks against collateral.
Reverse Repo Rate: The rate at which RBI absorbs excess liquidity from banks.
Bank Rate: The long-term lending rate (without collateral) that RBI charges banks.
Marginal Standing Facility (MSF): A penal-rate overnight lending window allowing banks to borrow using their SLR holdings.
Market Stabilisation Scheme (MSS): Issuance of special short-term bonds to mop up excess liquidity when needed.
Qualitative Tools (Selective Instruments)
Margin Requirement: Controls speculative lending by regulating the difference between asset value and loan maximum.
Consumer Credit Control: Imposes norms on down-payments and repayment durations for installment-based purchases.
Selective Rationing: Banks’ credit to specific sectors (e.g., real estate) may be restricted to curb excesses.
Moral Suasion: RBI urges banks to voluntarily align with broader economic goals.
Direct Action: RBI takes punitive steps against banks not complying with prescribed norms.
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The Reserve Bank of India publishes a Monetary Policy Report twice a year (February and August) to communicate its analysis and framework. The MPR includes:
Economic assessment: Current state of the economy (demand, supply, fiscal conditions, global outlook).
Forecasts: Medium-term projections for inflation and GDP growth. The report explains the outlook and risks (e.g. oil prices, monsoon, external demand).
Policy stance rationale: Explanation of rate decisions and stance. This transparency helps markets align expectations and holds the MPC accountable to its objectives.
Framework review: Any changes in policy framework (e.g. updating the inflation target period – set every 5 years, next by March 2026). The MPR is a key link between RBI’s analysis and monetary policy actions.
As India’s central bank, the Reserve Bank of India (RBI) both chairs the MPC and implements its decisions. Beyond setting rates, the RBI performs several functions that support the MPC’s goals:
Regulator and supervisor: RBI oversees banks and NBFCs to ensure a stable financial system. It sets prudential norms (like CRR/SLR, exposure limits) so that credit growth and asset quality align with macro stability.
Currency management: RBI issues currency and manages forex reserves. It intervenes in foreign exchange markets to smooth volatility (affecting inflation through import prices).
Financial markets operations: Through its Market Operations Department, RBI manages liquidity (via OMOs, variable repo auctions etc.) so that the banking system’s liquidity stays consistent with the repo rate.
Data & analysis: RBI’s monetary policy department and research teams supply inflation drivers, output trends, and model-based projections to the Committee.
Crisis management: In shocks (like COVID-19), RBI can inject extraordinary liquidity or support to banks, complementing MPC rate actions.
Inflation vs. Growth: The MPC often faces a trade-off. For example, food or fuel supply shocks can spike inflation (calling for rate hikes) even when growth is weak. Conversely, slowing growth may tempt rate cuts even if inflation is near target. Balancing these pressures is complex.
External shocks: The MPC must watch global risks – oil price swings, trade tensions (e.g. US tariffs), or global financial volatility. Such shocks can spill into India via import prices or capital flows, forcing the MPC to adjust its stance.
Transmission lag: Monetary policy works with a lag. It can take several quarters for a repo change to fully influence consumer prices and investment. Ensuring that transmission to bank lending is effective (through banking and NBFC credit channels) is crucial.
Inflation expectations: Keeping public expectations anchored is key. If people expect low inflation (because RBI signals commitment to 4%), then wage/price setting remains moderate. But unanchored expectations could undermine policy.
Structural issues: Non-monetary factors (like supply disruptions, tax policy, global commodity trends) can limit the MPC’s ability to control prices. Coordinating with government fiscal and supply-side measures is often necessary.
Looking ahead, the MPC will continue its data-driven approach:
Inflation targeting framework: The current target (4%±2%) runs until March 2026. The government, in consultation with RBI, will set the next target period, which is a key future milestone. This ensures accountability for inflation over the medium term.
Policy stance: Given that inflation has been below target and growth remains strong, the MPC’s near-term focus may stay on nurturing growth (“neutral” stance) while watching for inflationary signals. If inflation rises or growth falters unexpectedly, the stance can switch.
Despite challenges, the MPC is expected to stay committed to its core principles: price stability, sustainable growth, and financial stability. For UPSC aspirants, tracking RBI policy statements and reports is essential.
Q.What is the Liquidity Adjustment Facility (LAF)?
A.The Liquidity Adjustment Facility (LAF), managed by RBI, uses repo and reverse repo rates to manage liquidity, control inflation, stabilize interest rates, and ensure smooth short-term credit flow.
Q.Who are the members of India’s MPC?
A.Six members: the Reserve Bank Governor (Chair), the Deputy Governor in charge of monetary policy, one Reserve Bank Executive Director, and three experts appointed by the Government (4-year terms).
Q.What is Statutory Liquidity Ratio (SLR)?
A.The Statutory Liquidity Ratio (SLR) is the minimum percentage of a commercial bank’s net demand and time liabilities (NDTL) that it must maintain in the form of liquid assets such as cash, gold, or approved government securities before offering credit to customers.
Prelims
Q. With reference to Indian economy, consider the following: (2015)
Bank rate
Open market operations
Public debt
Public revenue
Which of the above is/are component/components of Monetary Policy?
(a) 1 only
(b) 2, 3 and 4
(c) 1 and 2
(d) 1, 3 and 4
Ans: (c)
Q. Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC)? (2017)
It decides the RBI’s benchmark interest rates.
It is a 12-member body including the Governor of RBI and is reconstituted every year.
It functions under the chairmanship of the Union Finance Minister.
Select the correct answer using the code given below:
(a) 1 only
(b) 1 and 2 only
(c) 3 only
(d) 2 and 3 only
Ans: (a)
Q. If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do? (2020)
Cut and optimise the Statutory Liquidity Ratio
Increase the Marginal Standing Facility Rate
Cut the Bank Rate and Repo Rate
Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3
Ans: (b)
India’s Monetary Policy Committee plays a central role in stabilizing the economy. Its decisions influence credit, markets and exchange rates, making the MPC a key link between the RBI and the economy. The committee’s formation in 2016 marked a shift towards more transparent, rule-based policy-making. For UPSC aspirants, understanding the MPC’s composition, mandate, and instruments is crucial for GS-III (Economy) topics. Aspirants should also follow RBI’s Monetary Policy Reports and press releases to stay updated on policy outlook. Overall, the MPC exemplifies India’s commitment to a disciplined monetary framework, essential for long-term economic health and consistent with global best practices.
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External Linking Suggestions
UPSC Official Website – Syllabus & Notification: https://upsc.gov.in/
Press Information Bureau – Government Announcements: https://pib.gov.in/
NCERT Official Website – Standard Books for UPSC: https://ncert.nic.in
