Context
- Recently, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), led by Governor Sanjay Malhotra, unanimously voted to keep the benchmark Repo Rate unchanged at 5.25%.
- This decision comes in the wake of a temporary ceasefire in West Asia announced by the U.S. administration. Despite the easing of immediate hostilities, the RBI has adopted a cautious “wait and watch” approach, maintaining a neutral stance while factoring in supply-side shocks, elevated energy prices, and their subsequent impact on India’s inflation and growth trajectory for the fiscal year 2026-27.
1. What is the Monetary Policy Committee?
The MPC is a statutory and institutionalized framework under the Reserve Bank of India Act, 1934, tasked with maintaining price stability while keeping in mind the objective of growth.
- Origin: It was established based on the recommendations of the Urjit Patel Committee.
- Mandate: The primary objective is to fix the benchmark policy rate (Repo Rate) to contain inflation within the specified target level (4% +_ 2%).
- Legal Provision: Section 45ZB of the amended RBI Act, 1934.
2. Composition of the MPC
The committee consists of six members:
- Governor of the RBI – Chairperson, ex officio.
- Deputy Governor of the RBI in charge of monetary policy – Member, ex officio.
- One officer of the RBI to be nominated by the Central Board – Member, ex officio.
- Three external members appointed by the Central Government – Members (usually economists of international repute).
| Note for Prelims: Each member has one vote. In case of a tie, the Governor has a casting vote (a second vote). The quorum for the meeting is four members. |
3. Key Policy Tools and Terms
- Repo Rate (Repurchasing Option): The rate at which the RBI lends money to commercial banks against the collateral of government securities. It is the primary tool to control the money supply.
- Neutral Stance: This indicates that the RBI is flexible and can move the interest rates in either direction (increase or decrease) based on incoming data. It suggests that the current rates are neither stimulative nor restrictive.
- Inflation Targeting: The RBI uses Consumer Price Index (CPI) combined as the headline inflation measure for its targets.
4. Current Macro-Economic Projections (April 2026)
| Parameter | New Projection (FY27) | Reason for Change |
| Real GDP Growth | 6.9% (Revised down from 7.6%) | Impact of West Asia conflict on energy/infra and supply shocks. |
| CPI Inflation | 4.6% (Revised up from 4.4%) | Elevated crude oil prices (factored at $85/barrel) and supply disruptions. |
| Repo Rate | 5.25% | Neutral stance to balance growth-inflation trade-off. |
Q. With reference to the Monetary Policy Committee (MPC), consider the following statements:
1. It is a statutory body constituted under the Banking Regulation Act, 1949.
2. The Governor of the Reserve Bank of India acts as the ex-officio Chairman of the committee.
3. A "Neutral Stance" in monetary policy implies that the RBI will strictly keep the repo rate unchanged for the next three quarters.
4. The decisions of the MPC are binding on the Reserve Bank of India.
How many of the above statements are correct?
(a) Only one
(b) Only two
(c) Only three
(d) All four
Answer: B) Only two
Solution:
• STATEMENT 1 IS INCORRECT: The MPC is a statutory body, but it was constituted under the Reserve Bank of India Act, 1934 (specifically Section 45ZB), not the Banking Regulation Act.
• STATEMENT 2 IS CORRECT: The Governor of the RBI is indeed the ex-officio Chairperson of the MPC.
• STATEMENT 3 IS INCORRECT: A Neutral Stance does not mean rates will stay unchanged for a fixed period; it means the RBI has the flexibility to move rates in either direction (up or down) depending on the economic data.
• STATEMENT 4 IS CORRECT: Under the RBI Act, the policy rate decided by the MPC is binding on the Reserve Bank.
