Section 45ZB of RBI Act : Section 45Zb: Constitution Of Monetary Policy Committee

Explanation using Example

Imagine the government is concerned about rising inflation, which is currently at 6%, above the target range of 2-4%. To address this, the Central Government decides to utilize Section 45ZB of The Reserve Bank of India Act, 1934, and issues a notification to constitute the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI).

The MPC is formed with the Governor of the RBI as the Chairperson, the Deputy Governor in charge of Monetary Policy, one nominated officer from the RBI's Central Board, and three experts appointed by the Central Government. Their task is to review current economic conditions and adjust the policy rate, which is the interest rate at which the RBI lends to commercial banks.

In their meeting, after analyzing various economic indicators, the MPC decides to increase the policy rate by 0.50% to curb inflation. This decision, as per the Act, is binding on the RBI, and it immediately affects the interest rates in the economy, potentially slowing down borrowing and spending, thereby helping to control inflation.