Monetary Policy Framework Agreement
The amended RBI Act of 1934 provides a legal and institutionalized framework for a six-member Monetary Policy Committee (MPC), which can be established by the central government through communication in the Official Gazette. The central government therefore formed the OAG in September 2016 with three members of the RBI, including the Governor as Chairman and three external members, in accordance with the Gazette Notification of 29 September 2016 (details of the composition of the OAG can be found in Appendix 3). The committee must meet at least four times a year, whereas it has met every two months since October 2016. Each member of the OAG shall have one vote and, in the event of a tie, the Governor shall have a second or decisive vote. The resolution adopted by the OAG will be issued at the end of each OAG meeting. On the 14th the day will be published the minutes of the deliberations of the OAG containing the resolution adopted by the OAG, the vote of each member on the resolution and the statement of each member on the resolution. There are five channels of monetary transmission: interest rate channel; the exchange channel; the asset pricing channel; Credit channel and waiting channel. The interest rate channel is described above. Monetary transmission takes place through the exchange channel when changes in monetary policy affect the interest rate gap between domestic and foreign interest rates, resulting in capital flows (inflows or outflows), which affects the exchange rate and thus the relative demand for exports and imports. Transmission through the asset price channel occurs when changes in monetary policy influence the price of assets such as stocks and real estate, leading to changes in consumption and investment.
A change in asset prices can lead to a change in consumer spending due to the resulting wealth effect. For example, if interest rates fall, people may consider buying assets that are not remunerated, such as real estate and equity. Increased demand for these assets can lead to higher prices, a positive wealth effect and therefore increased consumption. If stock prices rise, companies can increase their capital expenditures. Transfer by credit channel is carried out when monetary policy influences the amount of credit available. This can happen if the willingness of financial institutions to lend changes due to a change in monetary policy.. . .
