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Business News/ Markets / RBI MPC on Interest Rates: What is it? Why is it important? Here's all you need to know
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RBI MPC on Interest Rates: What is it? Why is it important? Here's all you need to know

RBI Governor Shaktikanta Das, will disclose today what the MPC decides on interest rates and monetary policy stance and what the committee thinks about the state of the Indian economy.

In May 2016, the RBI Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework. (REUTERS)Premium
In May 2016, the RBI Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework. (REUTERS)

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) will reveal its decision on key lending rates and assess India's growth and inflation today.

RBI Governor Shaktikanta Das will disclose what the MPC decides on interest rates and monetary policy stance and what the committee thinks about the state of the Indian economy.

Let us understand what this MPC is, how it functions and why it is important for the financial system.

What is RBI MPC?

MPC is a six-member committee whose primary goal is to keep inflation under the mandated level of 6 percent by determining the policy repo rate required to achieve this inflation target.

As per the RBI website, Section 45ZB of the amended RBI Act, 1934 provides for an empowered six-member monetary policy committee (MPC) to be constituted by the Central Government. The first such MPC was constituted on September 29, 2016.

In May 2016, the RBI Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework.

Under the Reserve Bank of India, Act,1934 (as amended in 2016), RBI is entrusted with the responsibility of conducting monetary policy in India with the primary objective of maintaining price stability while keeping in mind the objective of growth.

What is RBI MPC meet all about?

The RBI MPC meet is to determine key policy rates and other financial instruments which are required to achieve the inflation target.

RBI MPC normally meets after every two months, but it can have an out-of-term meeting also. It is required to meet at least four times in a year.

As per the RBI website, the quorum for the meeting of the MPC is four members. Each member of the MPC has one vote, and in the event of an equality of votes, the Governor has a second or casting vote. Each Member of the Monetary Policy Committee writes a statement specifying the reasons for voting in favour of or against the proposed resolution.

On August 5, 2016, the Central Government notified in the Official Gazette 4 percent Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016, to March 31, 2021, with the upper tolerance limit of 6 percent and the lower tolerance limit of 2 percent. On March 31, 2021, the Central Government retained the inflation target and the tolerance band for the next 5-year period – April 1, 2021, to March 31, 2026.

Why is it important?

The importance of the MPC meet rests on the fact that it determines the key lending rates which affect not only the functioning of the country's financial system but also the economy and inflation.

RBI MPC's decision on lending rates influences aggregate demand which is a crucial determinant of inflation and growth.

If inflation breaches the upper tolerance level of the RBI, the MPC tends to raise the repo rate which narrows the flow of liquidity in the system. This brings inflation down. When the central bank observes growth is faltering while inflation is at a comfortable level, it reduces lending rates so that the system has surplus liquidity and demand is boosted.

In simple terms, RBI MPC tries to maintain financial stability by ensuring adequate liquidity in the system and focuses on supporting economic growth without letting inflation go out of hand. Maintaining inflation is its prime responsibility mandated by the law.

What is special about the December meeting?

The December meeting of the RBI MPC is special because there are signs that the US Fed may go slower on rate hikes in the near future.

Besides, there are signs that inflation might have peaked. The country's economic indicators are also showing signs of pressure which may make the RBI raise rates slower than earlier anticipated levels.

However, it is unlikely that the RBI will take a pause on rate hikes. Inflation still remains above 6 percent which is RBI's upper tolerance level and growth has not deteriorated significantly.

The key area of focus will be RBI's commentary on growth and inflation.

How does it impact the economy and the markets?

Higher lending rates mean low liquidity in the system which negatively impacts demand and is bad for the economy. When the economy experiences pressure, the inflow to the stock market takes a hit.

How does it impact your home, car and other loans?

If repo rates are raised, loans become costlier. This is simply because for banks, the cost of borrowing money from the RBI rises which are passed on to account holders in the form of higher loan rates and deposit interest rates.
 

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These are the RBI's monetary policy instruments.
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These are the RBI's monetary policy instruments.

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Published: 06 Dec 2022, 03:15 PM IST
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