The Reserve Bank of India’s Monetary Policy Committee (MPC) convenes regularly to guide the country’s monetary policy. Established in 2016, the MPC’s primary role is to set the repo rate to maintain inflation within the target range of 4% plus or minus 2%. Despite its success in managing inflation, several structural and procedural challenges remain, affecting the clarity and effectiveness of India’s monetary policy framework.
Formation and Legal Framework of the MPC
The MPC was created by amending the Reserve Bank of India Act, 1934, introducing Chapter III-F. Section 45ZB(3) mandates the MPC to determine the policy rate to meet the inflation target. The policy rate is defined as the repo rate, which is the rate at which the RBI lends money to commercial banks against government securities. Other instruments such as the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are not included in the MPC’s voting powers.
Monetary Policy Instruments Beyond Repo Rate
The RBI uses multiple tools to influence liquidity and inflation. CRR and SLR have been traditional instruments since 1935 and 1949 respectively. The repo rate was introduced only in 1999. While the MPC votes on the repo rate, CRR and SLR are adjusted separately by the RBI governor without formal MPC approval. This separation creates ambiguity about decision-making and accountability.
Impact of MPC’s Limited Voting Scope
Limiting the MPC vote to the repo rate can cause mixed signals in policy interpretation. For example, in June 2025, the MPC cut the repo rate by 50 basis points but also reduced the CRR by 50 basis points. The repo rate decision was part of the MPC resolution, but the CRR change was only mentioned in the governor’s statement. Such divergence can confuse markets and stakeholders about the overall monetary stance.
Evolution of Monetary Policy Framework
A 2013 RBI committee recommended focusing MPC votes on the policy rate due to its role in liquidity management and interest rate transmission. It suggested reducing SLR to align with the liquidity coverage ratio but did not emphasise CRR changes. The government’s 2017 notification allowed the MPC chairperson discretion to include other instruments in resolutions, but in practice, this has not been fully exercised.
Transparency and Communication Challenges
The current setup dilutes the voices of external MPC members, who rarely participate in discussions on instruments other than the repo rate. The RBI governor and deputy governors handle communication on other monetary measures, creating a gap in transparency. The RBI’s Statement on Developmental and Regulatory Practices supplements policy information but is inconsistently released.
Need for Structural Reforms in MPC
To improve clarity and accountability, the MPC should be empowered to vote on all monetary policy instruments, including CRR and SLR. Linking speeches and interviews of all MPC members on the RBI website would enhance transparency. Streamlining decision-making will help markets better understand the RBI’s monetary stance and improve policy effectiveness.
Questions for UPSC:
- Discuss the significance of the Monetary Policy Committee in India’s inflation targeting framework and its impact on economic stability.
- Critically examine the role of multiple monetary policy instruments like repo rate, Cash Reserve Ratio, and Statutory Liquidity Ratio in managing liquidity and inflation in India.
- Explain the challenges of transparency and accountability in central bank monetary policy decision-making. How can these be addressed with suitable examples?
- With suitable examples, discuss the evolution of India’s monetary policy framework since independence and the implications of flexible inflation targeting on economic growth.
