UPSC Prelims 2017 Q11: Indian Economy – Banking and Finance
Which of the following statements is/are correct regarding the Monetary Policy Committee
(MPC)?
1. It decides the RBI's benchmark interest rates.
2. It is a 12 - member body including the Governor of RBI and is reconstituted every year.
3. It functions under the chairmanship of the Union Finance Minister.
Select the correct answer
using the code given below:
- (a) 1 only
- (b) 1 and 2 only
- (c) 3 only
- (d) 2 and 3 only
Answer: (a) 1 only
Explanation
Monetary Policy Committee (MPC)
Set up under Section 45ZB of the RBI Act, 1934 (amended 2016).
| Statement | Verdict | Fact |
|---|---|---|
| 1. It decides the RBI's benchmark interest rate | Correct | The MPC fixes the policy repo rate |
| 2. It has 12 members, including the Governor, and is reconstituted every year | Incorrect | It has six members; external members serve four-year terms |
| 3. It is chaired by the Finance Minister | Incorrect | The RBI Governor chairs it, with a casting vote |
Composition:
| Members | Who |
|---|---|
| 3 from RBI | Governor (chair), a Deputy Governor, one RBI officer |
| 3 external | Appointed by the Government on a search committee's advice |
Decisions are by majority vote; it meets at least four times a year.
Answer: (a) 1 only.
Why each option is right or wrong
- (a) CORRECT. The MPC sets the policy repo rate, the RBI's benchmark rate.
- (b) Incorrect. The MPC has six members, not 12, and external members serve four years.
- (c) Incorrect. The RBI Governor, not the Finance Minister, chairs the MPC.
- (d) Incorrect. Both 2 and 3 are false: six members, chaired by the Governor.
Key point
MPC (RBI Act Section 45ZB, 2016): six members (three RBI, three external), chaired by the RBI Governor with a casting vote; sets the repo rate.
Remember
MPC: six members, Governor chairs, sets repo rate.
Common mistakes
- Thinking the Finance Minister chairs it; that is the FSDC.
- Recalling the wrong size; the MPC has six members.
- Assuming yearly reconstitution; external members have four-year terms.
Exam tip
MPC = 6 members, Governor chairs, 4 meetings a year minimum, 4% inflation target.
Sources
- Reserve Bank of India Act, 1934 — Sections 45ZB-45ZL
- RBI — Monetary Policy Committee