The Monetary Policy Committee (MPC) is a statutory institution established in India to set the benchmark interest rate. Its creation was formalized by the Finance Act, 2016, which amended the Reserve Bank of India Act, 1934, by inserting Section 45ZB. The MPC was constituted on September 29, 2016, and its first meeting was held in October 2016.
The MPC was created to solve the problem of a lack of transparency and institutional accountability in monetary policy decisions. Before its establishment, the Reserve Bank of India (RBI) Governor solely determined the policy rate, often after informal consultations. The reform, recommended by the Urjit Patel Committee in 2014, shifted India to a collegial, rule-based framework of Flexible Inflation Targeting (FIT).
The MPC's primary mandate is to determine the Policy Repo Rate required to achieve the inflation target set by the Central Government. This target is currently 4% for the Consumer Price Index (CPI) inflation, with a tolerance band of +/- 2% (meaning the range is 2% to 6%). The MPC is a six-member body, consisting of three officials from the RBI and three external members appointed by the Central Government for a four-year term. The RBI Governor serves as the ex-officio Chairperson. The committee must meet at least four times a year, and its decisions are taken by majority vote. In case of a tie, the RBI Governor has a casting vote. The MPC's decision on the policy rate is binding on the RBI.
The MPC connects directly to the Reserve Bank of India Act, 1934, and the concept of inflation targeting. The MPC replaced the earlier system where the RBI Governor, advised by the non-binding Technical Advisory Committee (TAC), made the final decision. The core mechanism that stayed the same is that the RBI remains the central banking authority responsible for monetary policy, but the decision-making process was amended to be more transparent and accountable.