Monetary Policy Committee under Section 45ZB of the RBI Act

Until 2016, monetary policy in India rested on no statutory objective at all. The Governor decided the policy rate, the Reserve Bank explained its reasoning, and the only legal anchor was the general language of the preamble. The Finance Act, 2016 changed that by inserting Chapter IIIF into the Reserve Bank of India Act, 1934. India now has a statutory inflation target set by the Central Government, a statutory committee that decides the policy rate by majority, and a statutory consequence if the target is missed. This note sets out that framework.

Figure 1: How the monetary policy framework developed

1. How the Framework Came About

• Monetary targeting: from the mid 1980s the Bank followed a monetary targeting approach with feedback, aiming at broad money growth.
• Multiple indicators: from 1998 the Bank moved to a multiple indicator approach, looking at a range of variables without any single nominal anchor. The approach was criticised for lacking transparency and for leaving inflation expectations unanchored.
• The Urjit Patel Committee (2014): the Expert Committee to Revise and Strengthen the Monetary Policy Framework recommended flexible inflation targeting against the consumer price index, a numerical target, and decision making by a committee rather than by the Governor alone.
• The Agreement of 2015: a Monetary Policy Framework Agreement between the Central Government and the Bank, signed in February 2015, adopted the target before the law was changed.
• The statute (2016): the Finance Act, 2016 inserted Chapter IIIF, amended the preamble, and gave the arrangement statutory force. The Committee was constituted in September 2016 and met for the first time in October 2016.

2. The Inflation Target

• Who sets it (Section 45ZA): the Central Government, in consultation with the Bank, determines the inflation target in terms of the consumer price index once in every five years and notifies it in the Official Gazette, along with the upper and lower tolerance levels.
• The current target: four per cent, with an upper tolerance of six per cent and a lower tolerance of two per cent, notified on 25 March 2026 for the period 1 April 2026 to 31 March 2031. The same target and band had applied for the two preceding five year periods.
• Why a band and not a point: a band accommodates supply shocks, such as a failed monsoon or an oil price spike, which monetary policy cannot sensibly offset, while keeping expectations anchored to the central number.
• Why flexible: the framework is called flexible inflation targeting because Section 45ZA must be read with the amended preamble, which requires the Bank to maintain price stability while keeping in mind the objective of growth. Price stability is the primary objective, not the only consideration.
• Goal and instruments: the Government fixes the goal; the Committee chooses the instruments. That division is the Indian answer to the question of central bank independence.

3. The Monetary Policy Committee

Figure 2: Composition and decision making of the Committee

• Constitution (Section 45ZB): the Central Government constitutes the Committee by notification in the Official Gazette. It has six members.
• Members from the Bank: the Governor, who is chairperson, ex officio; the Deputy Governor in charge of monetary policy, ex officio; and one officer of the Bank nominated by the Central Board, ex officio.
• Members from outside: three persons appointed by the Central Government, who must be persons of ability, integrity and standing, having knowledge and experience in economics, banking, finance or monetary policy.
• Selection (Section 45ZC): the appointed members are chosen on the recommendation of a Search cum Selection Committee headed by the Cabinet Secretary, which includes the Governor, the Secretary, Department of Economic Affairs and three experts nominated by the Central Government.
• Term (Section 45ZD): four years, and the appointed members are not eligible for re-appointment. A single non-renewable term removes the incentive to please the appointing authority.
• Removal (Section 45ZE): the Central Government may remove an appointed member who is adjudged insolvent, becomes physically or mentally incapable, is convicted of an offence involving moral turpitude, failed to disclose a material conflict of interest at appointment, is absent from three consecutive meetings without leave, acquires an interest likely to prejudice his functions, accepts a post that would have barred his appointment, or abuses his position. On the last five grounds he must first be given a reasonable opportunity of being heard.
• Information (Section 45ZH): the Bank must give members the information relevant to achieving the inflation target, a member may ask for further data, models or analysis, and anything given to one member must be given to all.
• Effect of the decision: the Committee determines the policy rate required to achieve the target (Section 45ZB(3)), and its decision is binding on the Bank (Section 45ZB(4)). The Governor cannot depart from it.

4. Meetings and Voting

• Frequency (Section 45ZI): the Bank must organise at least four meetings of the Committee in a year, and must publish the schedule of meetings for the year at least one week before the first meeting. In practice the Committee meets six times a year, bimonthly.
• Changing the schedule: the schedule may be changed only by a decision taken at a previous meeting, or by the Governor if an additional or rescheduled meeting is necessary for administrative reasons, and any change must be published as soon as practicable.
• Quorum: four members, of whom at least one must be the Governor or, in his absence, the Deputy Governor who is a member.
• Presiding: the Governor presides, and in his absence the Deputy Governor member presides.
• Voting: each member has one vote, and decisions are by a majority of the members present and voting. In the event of a tie, the Governor has a second or casting vote.
• Reasons: each member must record a statement of the reasons for voting for or against a proposed resolution.

5. Transparency and Accountability

• Publication of minutes (Section 45ZL): on the fourteenth day after every meeting, the Bank must publish the minutes, which include the resolution adopted, the vote of each member on that resolution, and the statement of each member on the resolution. There is no anonymity and no collective voice.
• Monetary Policy Report (Section 45ZM): the Bank must publish, once in every six months, a document explaining the sources of inflation and the forecasts of inflation for the period between six and eighteen months from the date of publication.
• Failure (Section 45ZN): where the Bank fails to meet the inflation target, it must send a report to the Central Government stating the reasons for the failure, the remedial actions it proposes to take, and an estimate of the time within which the target will be achieved following those actions.
• What counts as failure: the framework notified by the Central Government defines failure as average inflation being more than the upper tolerance level for three consecutive quarters, or less than the lower tolerance level for three consecutive quarters. Undershooting is therefore a failure just as overshooting is.
• The first failure: the provision was first engaged in 2022, when inflation remained above six per cent from January to September. The Committee met separately to settle the report, which was sent to the Central Government and was not published.

6. Questions Arising

Is the Monetary Policy Committee's decision binding on the Governor?

Yes. Section 45ZB(4) provides that the decision of the Committee is binding on the Bank. The Governor has a vote and a casting vote in the event of a tie, but no power of override. That is the central change made in 2016: before it, the decision was the Governor's, informed by an advisory committee.

Why is the consumer price index used rather than the wholesale price index?

Because the target is about the cost of living faced by households, which is what shapes inflation expectations and wage bargaining. The wholesale price index excludes services, covers only transactions between businesses and does not reflect what people actually pay. The Urjit Patel Committee recommended the shift and Section 45ZA adopts the consumer price index expressly.

Can monetary policy control food and fuel inflation?

Only indirectly and with a lag. Food and fuel shocks are supply side and respond to rainfall, global prices and trade policy rather than to interest rates. The tolerance band exists precisely so that the Committee need not react to a transient supply shock. What monetary policy can do is prevent such a shock from feeding into generalised inflation through expectations and wages, which is why the Committee watches core inflation closely.

7. Quick Revision

8. Frequently Asked Questions

What is the current inflation target in India?

Four per cent consumer price inflation, with a lower tolerance level of two per cent and an upper tolerance level of six per cent. The Central Government notified it on 25 March 2026 under Section 45ZA for the five year period from 1 April 2026 to 31 March 2031, retaining the target that had applied since 2016.

Who are the members of the Monetary Policy Committee?

Six: the Governor as chairperson ex officio, the Deputy Governor in charge of monetary policy ex officio, one officer of the Bank nominated by the Central Board ex officio, and three persons appointed by the Central Government on the recommendation of a Search cum Selection Committee headed by the Cabinet Secretary.

How does the Monetary Policy Committee take decisions?

By a majority of the members present and voting, each member having one vote. The quorum is four members including the Governor or, in his absence, the Deputy Governor member. In the event of a tie the Governor has a casting vote. Each member must record the reasons for the way he voted, and those reasons are published.

What happens if the Reserve Bank misses the inflation target?

Section 45ZN requires the Bank to send the Central Government a report stating the reasons for the failure, the remedial actions proposed, and the estimated time within which the target will be met. Failure means average inflation outside the tolerance band for three consecutive quarters. The provision was first engaged in 2022.

What is flexible inflation targeting?

A framework in which the central bank is given a numerical inflation target as its primary objective but is permitted to take output and growth into account in deciding how quickly to return inflation to target. In India the flexibility comes from the tolerance band of two percentage points on either side and from the preamble, which requires price stability to be pursued while keeping in mind the objective of growth.

Is there any penalty if the RBI misses the inflation target?

No. Section 45ZN of the Reserve Bank of India Act, 1934 supplies the consequence, and it is a reporting consequence rather than a penal one. Failure to maintain the target means that average inflation has been outside the band of two to six per cent for three consecutive quarters. The Reserve Bank must then send a report to the Central Government stating the reasons for the failure, the remedial actions it proposes to take, and an estimate of the time within which the target will be achieved by implementing them. Nobody is removed and no sanction follows. The discipline is the obligation to explain in writing to the Government, which is a real constraint on a central bank whose credibility is its principal asset.

9. Related Topics and Provisions

• Instruments of monetary control
• Establishment and management of the Reserve Bank
• The Reserve Bank as banker to the Government and to banks
• Note issue and currency management
• Constitutional and legislative framework of banking