RBI Monetary Policy Framework and MPC

The Reserve Bank of India operates under a flexible inflation targeting framework, established by amendment to the RBI Act, 1934 in 2016 (Section 45ZA). The primary objective is to maintain inflation (measured by Consumer Price Index, CPI) at 4 percent with a tolerance band of ±2 percent (i.e., 2-6 percent). Breach of the upper or lower tolerance for three consecutive quarters triggers a mandatory report to the government explaining the reasons and remedial measures. The Monetary Policy Committee (MPC) is the six-member body that determines the policy repo rate:

• 3 RBI-side members: Governor (Chairperson ex-officio), Deputy Governor in charge of monetary policy, and one officer nominated by RBI Central Board.
• 3 government-side members: appointed by the Central Government on recommendation of a Search-cum-Selection Committee chaired by the Cabinet Secretary. These members serve four-year terms and are not eligible for reappointment.

The MPC meets at least 4 times per year. Decisions are by majority vote; in a tie, the Governor holds a casting vote. The policy repo rate is the rate at which RBI lends to commercial banks overnight against eligible collateral. It anchors short-term borrowing costs across the economy.