Monetary Policy Committee: Many Heads Better than One?

The most important policy tool in the post-reform period in overall macroeconomic management, particularly pursuing the objective of growth with controlled prices (inflation stability). Views of all the stakeholders in the economy, advice of the Technical Advisory Committee (TAC) contribute to the process for arriving at the key decision on policy repo rate-the rate at which the central bank lends to the banks. These nominated members are experts in the field of economics, banking, finance or monetary policy. The other three are from the Reserve Bank of India with the RBI Governor being the ex-officio chairperson. The MPC ensures that decisions on interest rates are made through debate and detailed discussions by a panel of experts. The many-heads-are-better-than-one approach ensures that the decision is not influenced by bias or lobbying. The adoption of “flexible inflation targeting” as the new policy framework, along with the amendment of the RBI Act, 1934, with effect fromJune 2016, the RBI formally joined the club of inflation targeters. The Finance Bill 2016 which included an amendment to the Reserve Bank of India Act, 1934 clipped the central bank governor's power to set monetary policy.