In the US, the Federal Open Market Committee meets to target the US Federal Funds rates, which in turn determines which way interest rates in the economy move.
In India, it is largely the role of that the Governor of the Reserve Bank of India plays. Now again, his views would assume importance and if he is an inflation hawk, he would not cut interest rates.
What is the Monetary Policy Committee?
In the last week of June 2016, the government decided that it was time that a Monetary Policy Committee (MPC) be set-up to determine the direction of interest rates. Accordingly, it was decided that this MPC would now determine the rate setting measures.
The Monetary Policy Committee would comprise six members, excluding the Reserve Bank of India governor. They would than meet to decide on policy rates. Let us say that there is a tie and three members of the committee decide against a hike and three for a hike. In such a case the RBI governor would cast his vote.
How will the Monetary Policy Committee set the rates?
Now remember that the RBI cuts repo rates, when inflation is low in the economy and hikes interest rates when inflation is high.
Repo rates are the interest rates at which the RBI lends money to central banks in the country. Now, what the Monetary Policy Committee would do is that it would cut interest rates by a majority decision.
It is important to remember that the committee would comprise three from the RBI and three from outside. The outsiders would be experts in the banking and economy who would bring tremendous knowledge and insight to the committee.
Are all the MPC members presently nominated?
No, at the moment the government has just nominated the new RBI governor to replace Dr Raghuram Rajan. It is expected that they would complete the process of nomination in the next few weeks.
It was the last of the quarterly review meetings and the next Monetary Policy quarterly meeting is likely to have the MPC in place.
Difficult job for the Monetary Policy Committee members
It is going to be a difficult job for the members, given that inflation has once again been rearing its head. In fact, retail inflation has touched a new 22-month high. However, the belief is that now since the committee would comprise some very senior experts, they maybe able to take the right decisions.
For individuals, interest rates in the economy assume paramount importance and hence the committee.
Almost every individual is affected by interest rates, because he or she either has a loan or a fixed deposit. The hope is that the new MPC would take the right decisions in the interset of individuals and the economy at large.