The Monetary Policy Committee (MPC) is a statutory and institutionalized framework responsible for setting India's benchmark interest rate, the Repo Rate. It is a committee of the Reserve Bank of India (RBI) and is defined in Section 2(iii)(cci) and constituted under Section 45ZB(1) of the Reserve Bank of India Act, 1934. The MPC was established following the Finance Act, 2016, which amended the RBI Act to provide a statutory basis for a formal monetary policy framework. This change was driven by the need for greater transparency and accountability in monetary policy decisions, moving away from the previous system where the RBI Governor solely made rate decisions. The MPC's creation solved the problem of a lack of institutional accountability by adopting a committee-based approach and a formal Flexible Inflation Targeting (FIT) framework.
The primary objective of the MPC is to maintain price stability while keeping in mind the objective of economic growth. It is mandated to keep the Consumer Price Index (CPI) inflation within a target of 4% with an upper tolerance limit of 6% and a lower tolerance limit of 2%. The MPC consists of six members: three officials from the RBI, including the Governor as the ex-officio Chairperson, and three external experts appointed by the Central Government. Decisions are taken by a majority vote, with the RBI Governor holding a second or casting vote in case of a tie. The committee is required to meet at least four times a year. A key provision is the accountability mechanism: if inflation remains outside the 2%–6% band for three consecutive quarters, the RBI must submit a report to the government explaining the failure and the planned remedial actions. The MPC connects directly to the Monetary Policy Framework Agreement signed between the Government of India and the RBI on February 20, 2015, which tasked the RBI with the responsibility for inflation targeting. The MPC's decisions are binding on the RBI.