Monetary Policy Committee
Why it matters?
The RBI's Monetary Policy Committee is likely to maintain the repo rate at 5.5% in its August meeting, adopting a neutral stance amid global uncertainties. While inflation may be revised downward, GDP forecast is expected to remain unchanged.
What should you know? Monetary Policy Committee (MPC):
The Monetary Policy Committee (MPC) is a statutory body constituted under the Reserve Bank of India Act, 1934 (amended in 2016).
The primary function of the MPC is to determine the policy repo rate required to achieve the inflation target.
The inflation target is set by the Government of India in consultation with the RBI; currently, it is 4% ± 2% (i.e., between 2% and 6%).
The MPC consists of six members:
Three members are from the RBI (including the RBI Governor).
Three external members are appointed by the Central Government.
The RBI Governor is the ex-officio Chairperson of the MPC.
Decisions of the MPC are taken by majority vote, with each member having one vote.
In case of a tie, the RBI Governor has the casting vote.
The MPC must meet at least four times a year, though it usually meets bi-monthly (i.e., six times a year).
The decisions of the MPC are binding on the RBI, including those regarding the repo rate.
External Benchmark Lending Rates (EBLR):
EBLR is a loan pricing mechanism in which the interest rate on loans is linked to an external benchmark, such as the Reserve Bank of India's repo rate, Treasury Bill yield, or other RBI-specified benchmarks.
These are directly linked to the repo rate.
This mechanism is mandatory for all new floating rate personal loans, retail loans, and MSME loans sanctioned from October 1, 2019, onwards.
Marginal Cost of Funds Based Lending Rate (MCLR):
The Marginal Cost of Funds-based Lending Rate (MCLR) is an internal benchmark rate set by banks below which they are not permitted to lend, except under certain conditions.
MCLR was introduced by the Reserve Bank of India in April 2016.
It is not directly tied to the repo rate.