Monetary Policy Framework Agreement

The Monetary Policy Framework Agreement (MPFA) is an agreement between the Government of India and the Reserve Bank of India (RBI) that formally established flexible inflation targeting as the framework for conducting monetary policy in India. The agreement was signed on 20 February 2015 and came into effect on 27 February 2015.

In May 2016, the RBI Act, 1934 was amended to provide a statutory basis for this framework.

Monetary Policy Framework in India

Objective

The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth.

Inflation Target

• Under Section 45ZA of the RBI Act, 1934, the Central Government, in consultation with RBI, determines the inflation target in terms of the Consumer Price Index (CPI) once every five years and notifies it in the Official Gazette.
• The inflation target is:
  • CPI Inflation Target → 4% (Tolerance band: ±2%)
    • Upper Tolerance Limit → 6%
    • Lower Tolerance Limit → 2%
• The same target and tolerance band have been retained over successive five year periods:

*In its second review on March 25, 2026, the Central Government retained the 4% inflation target with a tolerance band of 2% to 6% for the period April 1, 2026 to March 31, 2031.

Failure to Maintain the Inflation Target

RBI is considered to have failed to achieve the inflation target when:

• Average inflation exceeds the upper tolerance limit of 6% for any three consecutive quarters, or
• Average inflation falls below the lower tolerance limit of 2% for any three consecutive quarters.

What Happens if RBI Fails to Meet the Inflation Target?

If RBI fails to meet the inflation target, it is required to submit a report to the Central Government specifying:

• Reasons for failure to achieve the inflation target;
• Remedial actions proposed to be taken by RBI
• An estimate of the time-period within which the inflation target shall be achieved pursuant to timely implementation of proposed remedial actions.

Monetary Policy Committee

The Monetary Policy Committee (MPC) is a six member statutory body constituted under the RBI Act, 1934. The MPC determines the policy repo rate required to achieve the inflation target.

• Legal Backing
  • Constituted under Section 45ZB of the RBI Act, 1934 (amended in 2016).
  • The first such MPC was constituted on September 29, 2016, replacing the earlier practice where the RBI Governor alone decided policy rates.
• Composition of MPC (Total Members: 6)
  • 3 from RBI:
    • Governor of the Reserve Bank of India (Chairperson, ex officio)
    • Deputy Governor of the Reserve Bank of India, in charge of Monetary Policy (Member, ex officio)
    • One officer of the Reserve Bank of India to be nominated by the Central Board (Member, ex officio)
  • 3 appointed by Government of India
    • The three members of the MPC appointed by the Government of India hold office for a period of four years.
    • None of the central government nominees are eligible to be re-appointed
• Voting
  • Each member has one vote.
  • In case of a tie, the Governor has a second or casting vote.
• Quorum
  • The quorum for the meeting of the MPC is four members.
• Frequency of Meetings
  • The MPC is required to meet at least four times in a year. (More meetings can be held if the RBI Governor is of that opinion)
• Decision-making Process:
  • The decisions of the MPC are binding on the RBI.
• Transparency Measures
  • Minutes of MPC meetings are published 14 days after the meeting.
  • In addition, subsequent to the MPC meeting, RBI has to publish a document explaining the steps to be taken by it to implement the decisions of the Monetary Policy Committee.