Consumer price index (CPI)-based inflation hit a 17-month high of 5.2 per cent in December, which is significantly higher than the RBI target of 4 per cent. This increase in the CPI inflation was caused by spurt in food, housing and fuels. Taking this into consideration, the Monetary Policy Committee (MPC) did not make any changes in the repo rate and left it unchanged at 6 per cent.
It is the rate at which it provides liquidity to the banks. Several measures announced in the Union Budget viz., minimum support price at 1.5 times production cost for farmers, mega healthcare plan etc, may cause uptick in the inflation rate. According to ICRA, CPI inflation may hover over 4.7-5.4 per cent range in first half of 2018. Concerns over fiscal slippage as the government may cross its fiscal deficit target also will prevail upon the Monetary Policy Committee to take a hawkish stance and it may even hike the key interest rate, forecast analysts.
The Reserve Bank of India Act, 1934 (RBI Act) was amended by the Finance Act, 2016, to provide for a statutory and institutionalised framework for a Monetary Policy Committee, for maintaining price stability, while keeping in mind the objective of growth. The MPC replaced the system where the RBI Governor, with the aid and advice of his internal team and a technical advisory committee, had complete control over monetary policy decisions.
It has been entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level. It shall meet at least 4 times a year. Three Members will be from the RBI and the other three Members of MPC will be appointed by the Centre. They shall hold office for a period of four years.