Need to revisit MPC arrangement

The Monetary Policy Committee should vote on all the monetary instruments and not on the repo rate alone, to help improve transparency

- AMOL AGRAWAL

THE RESERVE BANK of India's (RBI) Monetary Policy Committee (MPC) meeting is scheduled to be held on August 4-6. The MPC was constituted in October 2016 as part of the RBI's formal adoption of flexible inflation targeting (FIT). Since its composition, the MPC has done a fine job of managing the monetary policy. However, one problem still remains—the MPC does not vote on all the monetary instruments.

The MPC's structure was established by amending the RBI Act (1934). Chapter III-F was introduced in the Act (1934), dedicated to inflation target and MPC. Section 45ZB (3) specifies that "the Monetary Policy Committee shall determine the policy rate required to achieve the inflation target". Section 2 (cccci) mentions that "policy rate" will mean the rate for repo transactions. Further, sub-section (12AB) of section 17 tells us "repo" means an instrument for borrowing funds by selling securities of the central or state governments. Thus, the RBI Act specifies that the MPC's main job is to achieve the inflation target (4+/- 2%). The MPC will achieve its job by determining the policy rate (repo rate). The other policy rates such as standing deposit facility and marginal standing facility form a corridor with repo, and both change automatically with changes in repo rate.