Question 40 from UPSC CSE 2017 - Economics

Question

Which of the following statements is/are correct regarding the 'Monetary Policy Committee (MPC)'?
1. It decides the RBI's benchmark interest rates.
2. It is a 12-member body including the Governor of RBI and is reconstituted every year.
3. It functions under the chairmanship of the Union Finance Minister.
Select the correct answer using the code given below:

IASCODEX · Accepted Answer

Correct Option: A. 1 only

Strategy: Identify the correct statement about the MPC's function. Spot the factual errors in the other statements regarding the committee's size (6 members, not 12) and its chairperson (RBI Governor, not the Union Finance Minister). Eliminate all options containing these incorrect statements, leaving the single correct answer.

Key Info: **Monetary Policy Committee (MPC)**
The Monetary Policy Committee (MPC) is a statutory committee of the Reserve Bank of India (RBI) responsible for determining the policy interest rate required to achieve the inflation target. Its decisions are crucial for managing liquidity and influencing the overall economic trajectory of the country.

**Establishment and Mandate**
The MPC was constituted by the Central Government under Section 45ZB of the amended RBI Act, 1934, following the recommendations of the Urjit Patel Committee. The framework became operational in 2016.
- **Primary Objective:** The primary mandate of the MPC is to maintain price stability while keeping in mind the objective of growth.
- **Inflation Target:** The Central Government, in consultation with the RBI, sets the inflation target. The current target is 4% Consumer Price Index (CPI) inflation, with an upper tolerance limit of 6% and a lower tolerance limit of 2%. This target is set for a five-year period.
- **Policy Instrument:** The MPC determines the policy repo rate to achieve the inflation target.

**Composition and Structure**
The MPC is a six-member body, not a twelve-member one as stated in the incorrect option.
- **Chairperson:** The Governor of the RBI is the ex-officio Chairperson of the MPC.
- **RBI Members (3):** The Governor, a Deputy Governor in charge of monetary policy, and one officer of the RBI nominated by the Central Board.
- **Government Appointees (3):** Three external members appointed by the Central Government. These members have a four-year term and are not eligible for re-appointment.
- **Decision-Making:** Decisions are made by a majority vote. In case of a tie, the Governor has a second or casting vote.

**Functioning and Accountability**
- **Meetings:** The committee is required to meet at least four times a year.
- **Transparency:** The resolution of the MPC is published after each meeting. The minutes of the proceedings, including the individual votes and statements of each member, are released 14 days after the meeting.
- **Accountability:** If the RBI fails to meet the inflation target for three consecutive quarters, it must submit a report to the government explaining the reasons for the failure, the remedial actions it proposes, and an estimated timeline for achieving the target.

IASCODEX · Answer

Option B: 1 and 2 only

IASCODEX · Answer

Option C: 3 only

IASCODEX · Answer

Option D: 2 and 3 only