What is the Monetary Policy Committee (MPC)?

About is Monetary Policy Committee (MPC):

• The MPC was setup after a Memorandum of Understanding between the government and the RBI about the conduct of the new inflation-targeting monetary policy framework.
• The Reserve Bank of India Act, 1934 (RBI Act) has been amended by the Finance Act, 2016 to provide for a statutory and institutionalized framework for an MPC.
• Under Section 45ZB of the amended RBI Act, 1934, the central government is empowered to constitute a six-member MPC.
• Function: The MPC is entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level. 
• The MPC replaced the previous arrangement of Technical Advisory Committee.
• Composition:
  • MPC will have six members: the RBI Governor (Chairperson), the RBI Deputy Governor in charge of monetary policy, one official nominated by the RBI Board, and the remaining three members would represent the Government of India.
  • The external members hold office for a period of four years.
• The quorum for a meeting shall be four Members, at least one of whom shall be the Governor and, in his absence, the Deputy Governor, who is the Member of the MPC.
• The MPC takes decisions based on a majority vote.In case of a tie, the RBI governor will have the second or casting vote.
• The decisionof the MPC would be binding on the RBI.
• RBI’s Monetary Policy Department (MPD) assists the MPC in formulating the monetary policy.

Q1: What is Repo rate?

Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation. In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.

Source: Government picks three new members to join RBI’s Monetary Policy Committee