The Monetary Policy Committee (MPC) is a statutory institution in India responsible for fixing the benchmark interest rate, the Repo Rate, to achieve the inflation target. It was constituted under Section 45ZB of the Reserve Bank of India Act, 1934, which was amended by the Finance Act, 2016. The MPC came into force on June 27, 2016, replacing the earlier system where the Governor of the Reserve Bank of India (RBI) alone made key interest rate decisions. The problem it solved was a lack of transparency and accountability in monetary policy decisions, which sometimes led to friction between the government and the RBI.
The MPC's primary mandate is to maintain price stability while keeping in mind the objective of growth. It operates within a Flexible Inflation Targeting (FIT) framework, aiming to keep the Consumer Price Index (CPI) inflation at 4% with a tolerance band of +/- 2%. The committee comprises six members: three officials from the RBI, including the RBI Governor as the ex officio Chairperson, and three external members nominated by the Central Government. The MPC must meet at least four times a year, and the quorum for a meeting is four members. Decisions are taken by a majority vote, with the Governor having a second or casting vote in case of a tie. The decision of the MPC is binding on the RBI. The MPC is connected to the RBI Act, 1934, and the Finance Act, 2016, which provided the legislative mandate for the FIT framework. A key provision is that the MPC is answerable to the Government of India if inflation exceeds the prescribed range for three consecutive quarters. The inflation target of 4% +/- 2% was set by the government in consultation with the RBI and is reviewed every five years.