Rethinking the Monetary Policy Committee Role, A Call for Comprehensive Voting Authority
Why in News?
The Reserve Bank of India (RBI) is set to hold its next Monetary Policy Committee (MPC) meeting between August 4–6. While the MPC has performed commendably in managing the policy rate and inflation targeting, recent discussions have reignited debate over its limited mandate—particularly its exclusion from voting on all monetary instruments except the repo rate. The call for revisiting the MPC’s powers, especially to vote on other instruments like the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), is growing stronger.
Introduction
The MPC, established in 2016, is a pivotal body responsible for setting the benchmark interest rate (repo rate) to achieve inflation targets under India’s flexible inflation targeting framework. However, its structure restricts it from voting on other critical instruments of monetary policy, such as the CRR, SLR, and liquidity tools. This division of power raises concerns about transparency, clarity, and the effectiveness of monetary policy transmission.
Economist Amol Agrawal, in his article titled “Need to revisit MPC arrangement,” raises important concerns regarding the structural limitations of the MPC, arguing that the committee should vote on all monetary instruments—not just the repo rate—to enhance transparency and policy coherence.
Historical Background of MPC and its Limitations
The formation of the MPC was part of the RBI’s strategic move towards inflation targeting. The framework was codified through amendments to the RBI Act, 1934, particularly with the introduction of Chapter III-F. According to Section 45ZB(3), the MPC is tasked with determining the policy rate required to achieve the inflation target, currently set at 4% ±2%.
The key focus has remained on the repo rate—the rate at which RBI lends money to commercial banks against government securities. While this tool directly influences the cost of borrowing and liquidity, other instruments also play a critical role in monetary transmission.
MPC’s Authority Defined by Law
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The MPC only votes on the repo rate.
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The RBI Act does not allow the MPC to vote on CRR or SLR adjustments, even though they are essential for liquidity and monetary control.
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For example, Section 17(2AB) of the RBI Act refers to repo transactions as a means of liquidity, but the Act still limits the MPC’s role to repo-rate decisions.
The Importance of Other Monetary Tools
Before the 1991 economic reforms, the RBI used the CRR and SLR extensively to manage liquidity and monetary supply. Over time, the RBI shifted to the repo rate to improve the alignment between policy rates and market interest rates. However, this change did not reduce the influence of CRR and SLR in practice.
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CRR (Cash Reserve Ratio): The percentage of a bank’s total deposits that must be maintained with the RBI in cash. It directly affects liquidity in the banking system.
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SLR (Statutory Liquidity Ratio): The percentage of net demand and time liabilities (NDTL) banks must maintain in the form of liquid assets like gold or government-approved securities.
Both these tools significantly influence monetary policy but are not subject to MPC’s vote, making monetary governance partially opaque.
Practical Examples Highlighting the Issue
The article provides an insightful example:
In a past policy decision, the RBI cut the repo rate by 50 basis points (bps) to 6%, while market analysts had anticipated a smaller cut of 25 bps. At the same time, the CRR was also reduced by 50 bps to improve liquidity—but this was not part of the MPC’s resolution.
This simultaneous decision-making—where the MPC votes on one measure, and the RBI enacts others—creates policy inconsistency and communication confusion. It raises a key question: If both instruments are part of monetary policy, why doesn’t the MPC vote on all of them?
What the Author Recommends
Amol Agrawal suggests that:
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The MPC should be empowered to vote on all monetary policy instruments, not just the repo rate.
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A clearer division of responsibilities is required to avoid mixed signals and ensure market confidence.
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The current arrangement, where the governor’s statement includes information on CRR and SLR but the MPC resolution remains silent on them, lacks transparency.
He adds that odd situations can arise—for example, the MPC may vote to keep the repo rate unchanged while the RBI tweaks CRR/SLR for liquidity, creating conflicting market expectations.
Institutional and Policy-Level Reforms Needed
To address the gap, Agrawal proposes a revision in how monetary decisions are made and communicated:
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Legislative Amendment:
Amend the RBI Act to empower the MPC with voting rights over CRR, SLR, and other liquidity tools. -
Broadened Mandate:
Include all liquidity-affecting tools under the MPC’s purview to unify policy stance. -
Transparency through Communication:
The RBI should issue a single, comprehensive monetary policy statement post-MPC meetings. Currently, two separate documents—the governor’s statement and MPC resolution—lead to ambiguity. -
Institutional Reforms:
Strengthen the legal framework and clarify roles between the central board of the RBI and the MPC.
The Case for Institutional Clarity
The RBI publishes the Statement on Developmental and Regulatory Policies (SDRP) alongside the MPC resolution. This document includes various regulatory and market-related announcements, many of which significantly impact liquidity and credit flows.
The problem lies in the disconnection between the MPC resolution and SDRP announcements. Key monetary decisions made in SDRP—like altering CRR, changing repo tenures, or releasing targeted long-term repo operations (TLTROs)—are perceived by markets as policy decisions, even though they bypass MPC voting.
This undermines the credibility of MPC decisions and causes confusion among investors, banks, and policymakers.
The Way Forward
As India continues to evolve into a more market-aligned and globally integrated economy, its monetary policy apparatus must also adapt. Agrawal’s proposition for revisiting the MPC’s scope is both timely and essential.
To enhance policy credibility and effectiveness:
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All market-sensitive monetary instruments must be governed by a transparent voting process.
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The RBI and MPC should publish a joint policy communication, replacing the dual-report format.
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The MPC’s role should be revisited in light of modern monetary challenges, including financial crises, inflationary shocks, and geopolitical supply chain disruptions.
Conclusion
The current MPC structure, while revolutionary for its time, now appears outdated in the face of dynamic economic conditions and multi-pronged monetary tools. There is an urgent need to rethink its architecture and empower it with full-spectrum authority.
By allowing the MPC to vote on all monetary tools—repo, CRR, SLR, and others—India will not only align itself with global best practices but also bring transparency and clarity to its monetary policy framework.
Q&A Section
Q1. What is the main concern raised by Amol Agrawal in the article?
A: The author argues that the MPC’s authority is limited because it only votes on the repo rate, not on other key instruments like the CRR and SLR. This limited mandate creates confusion and lacks transparency in policy implementation.
Q2. Why is it problematic that the MPC doesn’t vote on CRR and SLR?
A: CRR and SLR are critical tools for managing liquidity in the banking system. When these tools are changed without MPC’s involvement, it sends mixed signals to the market and weakens the transparency of monetary decisions.
Q3. What is the repo rate, and why is it central to MPC decisions?
A: The repo rate is the rate at which the RBI lends money to commercial banks. It is the primary tool for influencing borrowing costs and inflation. However, focusing only on the repo rate ignores the broader toolkit of monetary policy.
Q4. What institutional reforms does the article recommend?
A:
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Amending the RBI Act to expand the MPC’s powers.
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Merging the MPC resolution and RBI governor’s statement into a single document.
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Clarifying roles between the RBI and MPC to avoid overlapping responsibilities.
Q5. How can these changes improve India’s monetary policy system?
A: Expanding the MPC’s scope will improve transparency, reduce confusion, enhance credibility, and ensure that all monetary policy decisions reflect a unified and democratic process.
