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Q11 (IAS/2017) Economy › Money, Banking & Inflation › Central banking functions Official Key

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 :

Result
Your answer: —  ·  Correct: A
Explanation

The correct answer is option A – only statement 1 is correct.

From 2016, the MPC reviews and fixes the benchmark policy rate (repo rate) which is required to contain inflation within the specified target level.[1] MPC has the authority to decide the repo rate only and not reverse repo, CRR, SLR etc.[2] Therefore, statement 1 is correct.

Statement 2 is incorrect on both counts. MPC has 6 members, three from RBI (including the RBI Governor) and 3 appointed by the Government of India.[2] Additionally, the three external members hold office for 4 years and are not eligible for re-appointment,[3] so it is not reconstituted every year.

Statement 3 is also incorrect. RBI Governor is the ex-officio Chairperson of MPC,[3] not the Union Finance Minister. Therefore, only statement 1 is correct, making option A the right answer.

Sources
  1. [1] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > MONETARY POLICY COMMITTEE > p. 172
  2. [2] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.13 Monetary Policy > p. 60
  3. [3] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > Composition of MPC > p. 173
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Q. Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC) ? 1. It decides the RBI's benchmark intere…
At a glance
Origin: Mixed / unclear origin Fairness: Low / Borderline fairness Books / CA: 4/10 · 0/10
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This is a classic 'Sitter' disguised as a technical question. It stems directly from the 2016 amendment to the RBI Act, which was a major current affairs headline. If you read any standard Economy material (Singhania or Vivek Singh) or followed the news, the composition (6 members) and Chair (RBI Governor) are non-negotiable basics.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
Does the Monetary Policy Committee (MPC) of India decide the Reserve Bank of India's benchmark interest rates such as the repo rate?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > MONETARY POLICY COMMITTEE > p. 172
Presence: 5/5
“To target this inflation, policy interest rate (repo rate) is reviewed and changed periodically by RBI. Before the constitution of MPC, the Governor of RBI in consultation with the Technical Advisory Committee of RBI and other experts used to fix the policy interest rate (repo rate). But from 2016, the MPC reviews and fixes the benchmark policy rate (repo rate) which is required to contain inflation within the specified target level.”
Why this source?
  • Explicitly states that from 2016 the MPC reviews and fixes the benchmark policy rate (repo rate).
  • Contrasts earlier practice (Governor with advisory committee) with post-2016 MPC authority, directly attributing repo-rate decisions to MPC.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.13 Monetary Policy > p. 60
Presence: 5/5
“Presently RBI conducts the meetings of MPC 6 times a year i.e., bi-monthly. But there can be "Off-cycle" meeting of MPC as well if the situation warrants.• MPC has 6 members, three from RBI (including the RBI Governor) and 3 appointed by the Government of India. All the members have one vote and in the event of equality of votes, the Governor gets a second or casting vote.• The decision of the MPC is binding on RBI. MPC has the authority to decide the repo rate only and not reverse repo, CRR, SLR etc. There are two components in the MPC framework: Inflation and the requirements of growth in mind.”
Why this source?
  • Says the decision of the MPC is binding on RBI, indicating MPC's determinations must be followed by the central bank.
  • Specifically notes MPC 'has the authority to decide the repo rate only', directly confirming MPC's power over the repo rate.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 61
Presence: 4/5
“1. Repo Rate: The interest rate at which the RBI provides overnight liquidity up to a certain limit (0.25% of their NDTL) to banks against the collateral of government and other approved securities under the Liquidity Adjustment Facility (LAF). Repo is short form of "Repurchase Agreement". When banks borrow from RBI at repo rate, banks keep Government securities with RBI and get cash in return, with a promise that they will return (after overnight) this cash to RBI and RBI will return the government securities to banks. Repo Rate is also called the "Policy Rate". 2. Reverse Repo Rate: The interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.”
Why this source?
  • Defines the repo rate as the 'Policy Rate' used by the RBI—clarifies what is meant by 'benchmark interest rate'.
  • Helps link the MPC's decision-making (per other snippets) to the key policy instrument used by RBI.
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Statement analysis

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Statement analysis

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Statement analysis

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