RBI Monetary Policy: A Guide to India’s

Financial Backbone
Last Updated: November 6, 2024

Key Takeaways

 The Reserve Bank of India (RBI) uses monetary policy to regulate the money supply in
the economy.
 One of the primary objectives is to maintain price stability and control inflation.
 The RBI aims to promote economic growth by ensuring adequate credit availability.
 Financial stability is crucial, and the RBI actively manages systemic risks within the
financial sector.
 Key tools of monetary policy include the repo rate, cash reserve ratio (CRR), and open
market operations.
 There are two main types of monetary policy: expansionary (to stimulate growth) and
contractionary (to control inflation).
 Understanding these policies helps individuals and businesses navigate the financial
landscape effectively.

The Reserve Bank of India (RBI) plays a significant role in shaping the economic landscape
of the country through its monetary policy. This policy is crucial as it impacts everything
from interest rates to the availability of credit, directly influencing business operations and
growth opportunities. Let us understand how it affects individuals and their financial journey.

TABLE OF CONTENTSSHOW

What is the Monetary Policy of RBI?

The Monetary Policy of the Reserve Bank of India (RBI) refers to the process through
which the RBI manages the supply of money in the economy to achieve specific economic
objectives. The primary focus of this policy is to control inflation and foster stable economic
growth. By adjusting the availability of money and credit, the RBI aims to create a conducive
environment for sustainable economic development.

Objectives of RBI’s Monetary Policy

1. Price Stability: One of the primary objectives is to maintain price stability to protect
the purchasing power of the currency and control inflation.
2. Economic Growth: The RBI aims to promote growth by ensuring that adequate credit
is available to productive sectors of the economy.
3. Financial Stability: Ensuring a stable financial system is crucial for sustaining
economic growth. The RBI monitors and manages systemic risks in the financial sector.
4. Exchange Rate Stability: The RBI also aims to manage the exchange rate to stabilize
the economy and prevent excessive volatility.
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Tools of Monetary Policy

The RBI uses various tools to implement its monetary policy, which can be classified into
two main categories: Quantitative Tools and Qualitative Tools.

1. Quantitative Tools

 Repo Rate: The rate at which the RBI lends money to commercial banks. A lower repo
rate makes borrowing cheaper, encouraging spending and investment, while a higher
rate can help control inflation.
 Reverse Repo Rate: The rate at which the RBI borrows money from banks. This helps
absorb excess liquidity in the banking system.
 Cash Reserve Ratio (CRR): The percentage of a bank’s total deposits that must be
maintained as reserves with the RBI. A higher CRR means less money available for
banks to lend, impacting money supply.
 Statutory Liquidity Ratio (SLR): The minimum percentage of a bank’s net demand
and time liabilities that must be held in liquid assets. Similar to CRR, changes
in SLR influence the money supply.
 Marginal Standing Facility (MSF): A facility that allows banks to borrow overnight
funds from the RBI at a higher interest rate than the repo rate, usually used in
emergencies.

Read more: Repo Rate vs Reverse Repo Rate

2. Qualitative Tools

 Moral Suasion: The RBI uses persuasive communication with banks to encourage them
to adhere to policy objectives.
 Direct Action: The RBI may take direct action against banks that do not comply with
monetary policy guidelines.

Role and Objectives of Monetary Policy in India

Monetary Policy of the Reserve Bank of India (RBI)

The Monetary Policy of the Reserve Bank of India (RBI) is a crucial framework through
which the RBI manages the economy’s money supply to achieve specific economic
objectives. It involves a strategic approach to control inflation, stimulate economic growth,
and maintain financial stability.

Role of Monetary Policy

1. Implementation of Monetary Control: The RBI utilizes various tools to influence the
money supply and interest rates, thereby shaping economic conditions.

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 2. Regulation of Financial Institutions: The RBI ensures that banks and financial entities
operate within regulatory standards, promoting a safe and sound financial environment.
3. Monitoring Economic Indicators: Continuous assessment of key economic
indicators—such as inflation rates, GDP growth, and employment statistics—guides the
RBI in making informed policy decisions.
4. Crisis Management: The RBI plays a vital role in responding to economic shocks,
providing necessary liquidity to stabilize the economy during financial crises.

Objectives of Monetary Policy

1. Price Stability: A primary objective is to maintain low and stable inflation, protecting
the purchasing power of the currency and enhancing economic certainty.
2. Economic Growth: The RBI aims to promote sustainable economic growth by
ensuring that adequate credit is available to productive sectors of the economy,
encouraging investment and consumption.
3. Financial Stability: Ensuring a stable financial system is critical for sustaining growth.
The RBI actively manages systemic risks within the financial sector to prevent
disruptions.
4. Exchange Rate Stability: The RBI seeks to manage the exchange rate of the Indian
Rupee to mitigate excessive volatility, supporting international trade and investment.
5. Employment Generation: Indirectly, by fostering economic growth and investment,
the RBI’s monetary policy also supports job creation and overall economic welfare.

Types of Monetary Policy in India

Monetary policy in India is primarily managed by the Reserve Bank of India (RBI) and can
be classified into two main types: Expansionary Monetary Policy and Contractionary
Monetary Policy. Each type serves distinct purposes based on the prevailing economic
conditions.

1. Expansionary Monetary Policy

Objective: The primary aim is to stimulate economic growth, especially during periods of
recession or economic slowdown.

 Definition: This policy involves increasing the money supply and reducing interest
rates to encourage borrowing and spending by consumers and businesses.
 Tools Used:
o Lowering Repo Rate: Makes loans cheaper for banks, leading to lower interest
rates for consumers and businesses.
o Reducing CRR and SLR: Allows banks to have more funds available for
lending, increasing the overall money supply in the economy.
o Purchasing Government Securities: Through open market operations, the RBI
buys government bonds, injecting liquidity into the financial system.
 Effects:
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 o Encourages consumer spending and business investments.
o Aims to reduce unemployment and boost economic activity.

2. Contractionary Monetary Policy

Objective: The main aim is to control inflation and stabilize the economy during periods of
excessive growth.

 Definition: This policy involves decreasing the money supply and increasing interest
rates to curb excessive spending and inflation.
 Tools Used:
o Raising Repo Rate: Increases borrowing costs, which discourages spending and
investment.
o Increasing CRR and SLR: Requires banks to hold a larger portion of their
deposits in reserves, reducing the funds available for lending.
o Selling Government Securities: The RBI sells government bonds to absorb
excess liquidity from the banking system.
 Effects:
o Reduces inflationary pressures by discouraging excessive borrowing and
spending.
o Aims to stabilize prices and maintain the value of the currency.

Comparison of Expansionary and Contractionary Monetary Policy

Aspect Expansionary Monetary Policy Contractionary Monetary

Policy

Definition A policy aimed at increasing the A policy aimed at decreasing the

money supply and lowering interest money supply and raising interest
rates to stimulate economic growth. rates to control inflation.

Objective To boost economic growth, reduce To curb inflation, stabilize prices,

unemployment, and increase and prevent an overheating
spending during economic economy.
slowdowns.

Key Tools Lowering the repo rate- Reducing Raising the repo rate- Increasing
Cash Reserve Ratio (CRR)Reducing Cash Reserve Ratio
Statutory Liquidity Ratio (CRR)Increasing Statutory
(SLR)Purchasing government Liquidity Ratio (SLR) Selling
securities in open market operations government securities in open
market operations

Impact on Lowers interest rates, making Raises interest rates, increasing

Interest Rates borrowing cheaper for consumers borrowing costs for consumers

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 and businesses. and businesses.

Effect on Increases the money supply, Decreases the money supply,

Money Supply encouraging banks to lend more. making funds less available for
lending.

Effects on Increases consumer spending- – Reduces consumer spending-

Economy Encourages business Discourages business
investmentReduces unemployment- investment- Aims to control
Can lead to higher inflation if inflation- Can lead to higher
overused unemployment if overly
restrictive

When Used During economic recessions, high During periods of high inflation
unemployment, or when economic or when the economy is
growth is sluggish. overheating due to excessive
growth.

Long-term Can lead to sustained economic Helps maintain price stability and
Effects growth if managed carefully, but protects the currency’s value, but
may result in inflation if not can hinder growth if applied too
monitored. rigidly.

In summary, the Monetary Policy of the Reserve Bank of India (RBI) is vital for managing
the economy’s money supply, controlling inflation, and promoting sustainable growth. By
adjusting interest rates and using various tools like the repo rate and cash reserve ratio, the
RBI strives to maintain financial stability and support economic development. Understanding
these aspects helps individuals and businesses navigate the financial landscape more
effectively.

Disclaimer: Nothing on this blog constitutes investment advice, performance data or any
recommendation that any security, portfolio of securities, investment product, transaction or
investment strategy is suitable for any specific person. You should not use this blog to make
financial decisions. We highly recommend you seek professional advice from someone who
is authorised to provide investment advice.

Monetary Policy in India: Meaning, Types,

Tools & More
Monetary Policy in India is the lifeblood of India’s economy. As a critical economic
management tool, it helps the RBI and the Government to control the supply of money,
manage inflation, and achieve economic stability. This article of NEXT IAS aims to study in
detail the Monetary Policy in India, its meaning, types, the process of formulation, major
tools used therein, and other related concepts.
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What is Monetary Policy?

It is a macroeconomic policy tool used by the Central Bank to influence the money
supply in the economy to achieve certain macroeconomic goals. It involves the use of
monetary instruments by the central bank to regulate the availability of credit in the market to
achieve the ultimate objective of economic policy.

Objectives of Monetary Policy

Some of its major objectives are as follows:

 Accelerating the growth of the economy.

 Maintaining price stability.
 Generating employment.
 Stabilizing the exchange rate.

Monetary Policy vs Fiscal Policy

The two policies differ in various respects as can be seen below.

Fiscal Policy Monetary Policy

It is a macro-economic policy used
It is a macroeconomic policy used
by the government to adjust its
Definition by the Central Bank to influence
spending levels and tax rates to
money supply and interest rates.
monitor a nation’s economy
Institutional
Controlled by the Government Controlled by the Central Bank
Control
To influence the money supply and
Prime Objective To influence the economic condition
interest rates.
Public Expenditure, Taxation, Bank Rate, Cash Reserve Ratio,
Major Tools
Public Borrowing etc Statutory Liquidity Ratio etc

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Types of Monetary Policy

Broadly, there are two types of monetary policy – Expansionary Monetary Policy, and
Contractionary Monetary Policy.

What is Expansionary Monetary Policy?

 It is also called Accommodative Monetary Policy.

 Its primary purpose is to increase the money supply in the economy through
measures such as:
o Decreasing interest rates – It makes it less expensive for consumers to
borrow money, thus increasing the money supply in the market.
o Lowering reserve requirements for banks – It leaves commercial banks
with more money to lend to the public, thus infusing more money into the
economy.
o Purchasing government securities by central banks – The RBI buys
government securities by paying cash. This means that money available in the
market increases.
 It is aimed at fueling economic growth by stimulating business activities and
consumer spending and also helps to lower unemployment rates.
 However, it may have an adverse effect of occasional hyperinflation.

What is Contractionary Monetary Policy?

 It is used to decrease the amount of money supply in the economy through

measures such as:
o Raising interest rates – It makes it more expensive for consumers to borrow
money, thus reducing the money supply in the market.

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 o Increasing the reserve requirements for banks – It leaves commercial
banks with less money to lend to the public, thus reducing the money supply
in the economy.
o Selling government bonds – The buyers of government securities pay cash to
the RBI. This means that money available in the market decreases.
 It is aimed at reducing inflation.

Monetary Policy in India

In India, the Reserve Bank of India Act of 1934 explicitly mandates the Reserve Bank of
India (RBI) with the responsibility of formulating the monetary policy for the country.
The process of monetary policy formulation in India underwent a paradigm shift in the year
2016 as explained below.

Pre-2016
Prior to the year 2016, the Governor of RBI was singularly responsible for the formulation
of monetary policy in India. Although the Governor was advised by a Technical Committee,
but he could veto decisions.

Post-2016

 The Finance Act of 2016 amended the RBI Act of 1934 to set up a Monetary Policy
Committee (MPC).
o At present, monetary policy in India is formulated by this committee.

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Monetary Policy and Inflation in India – Flexible Inflation Target (FIT) Framework

Background

 In 2015, the RBI and the Center entered into a Monetary Policy Framework
Agreement that stipulated a primary objective of ensuring price stability while
keeping in mind the objective of growth.
 Accordingly, the Reserve Bank of India Act, of 1934 was amended and the Flexible
Inflation Target (FIT) was adopted in 2016 to establish a liaison between monetary
policy and inflation in India.

Prominent Provisions

 The inflation target is set by the Center, in consultation with the RBI, once every
5 years.
 For the period 2021-25, the inflation is to be kept in the range of 4 (+/-2) percent.
 The Headline Consumer Price Inflation has been chosen as a key indicator.

Pros of Flexible Inflation Targeting (FIT)

 Rising prices create uncertainties and adversely affect savings and investments. By
keeping inflation in check, it aims to bring more stability, predictability, and
transparency in deciding major policies.

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  To make the RBI more accountable to the government if it fails to meet the inflation
targets.

Cons of Flexible Inflation Targeting (FIT)

Fixed inflation targets restrain the RBI from taking any tight policy stance.

Monetary Policy Committee (MPC)

 The idea to set up MPC was mooted by an RBI-appointed Urjit Patel Committee.
 Section 45ZB of the amended RBI Act, 1934 provides for an empowered 6-
member Monetary Policy Committee (MPC).
 Some of the major provisions with reference to the MPC are:
o The Committee is to meet at least 4 times a year.
o The Committee will have 6 members.
o The members of MPC shall hold office for a period of 4 years and shall not
be eligible for re-appointment.
o The quorum for a meeting of the MPC is 4 members.
o The RBI Governor will have a casting vote in case of a tie

Composition of MPC

 RBI Governor – Chairperson

 RBI Deputy Governor in charge of monetary policy,
 One official nominated by the RBI Board,
 3 members are appointed by the Central Government based on the recommendations
of a search cum selection committee comprised of
o the Cabinet Secretary
o the Secretary of the Department of Economic Affairs
o the RBI Governor, and
o three experts in the field of economics or banking as nominated by the Central
Government.

Monetary Policy Tools in India

Various instruments used by the RBI to control the money supply can be categorized into two
categories:

 Quantitative Tools – Quantitative tools of monetary policy are aimed at

controlling the cost and quantity of credit.
 Qualitative Tools – Qualitative tools of monetary policy are aimed at
controlling the use and direction of credit.
o The qualitative measures do not regulate the total amount of credit created
by commercial banks. Rather, they make a distinction between good credit and
bad credit and regulate only such credit which creates economic instability.
Therefore, qualitative measures are known as the selective measures of
credit control.
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Quantitative Tools of Monetary Policy

Major instruments coming in this category are explained below:

Bank Rate or Discount Rate

 Bank Rate or Discount Rate is the rate at which the RBI is ready to buy or
rediscount Bills of Exchange or other Commercial Papers from the Scheduled
Commercial Banks (SCBs).
 If the RBI fixes a high Bank Rate, banks would not want to rediscount bills from the
RBI as their profits will be low. This will have the effect of reducing the money
supply in the market.
 Thus, an increase in the Bank Rate results in a tightening of money supply and
vice versa.

Reserve Requirements
The reserve requirement or required reserve ratio is a bank regulation that sets the minimum
reserves each bank must hold as a part of the deposits.

It comprises two instruments:

Cash Reserve Ratio (CRR)

 Cash Reserve Ratio (CRR) is the minimum percentage of a bank’s total Demand and
Time Liabilities (DTL) that a Scheduled Commercial Bank is obligated to deposit
with the RBI in the form of cash.
 RBI does not pay any interest on CRR deposits.
 RBI Act does not prescribe any range (ceiling or floor) for fixing CRR. Thus, RBI has
the freedom to fix the CRR at any rate depending on the macroeconomic conditions.
o If CRR is increased: If the RBI increases the CRR, the commercial banks
have to deposit more money with the RBI and are left with less money to lend
to customers. Thus, the effect is reduced money supply in the economy.

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 o If CRR is decreased: If the RBI decreases the CRR, the commercial banks
have to deposit less money with the RBI and are left with more money to lend
to customers. Thus, the effect is increased money supply in the economy.

Statutory Liquidity Ratio (SLR)

 Statutory Liquidity Ratio (SLR) is the percentage of Net Demand and Time Liabilities
(NDTL) that a Scheduled Commercial Bank (SCB) has to keep with itself, in the
form of:
o Cash, or
o Gold, or
o SLR Securities (such as government bonds, treasury bills, and any other
instrument notified by the RBI), or
o Any combination of the above three.
 Unlike the CRR, SLR need not be deposited with RBI.
 The range of SLR prescribed by the RBI is from 0 percent to 40 percent.
o If SLR is increased: If the RBI increases the SLR, the commercial banks are
left with less money to lend to customers. Thus, the effect is reduced money
supply in the economy.
o If CRR is decreased: If the RBI decreases the SLR, the commercial banks are
left with more money to lend to customers. Thus, the effect is increased
money supply in the economy.
 If the bank fails to maintain the required SLR, then it is liable to pay penal interest at
(Bank Rate + 3%) per annum above the bank rate, on the shortfall amount.
o If the shortfall continues for the next succeeding day, penal interest is to be
paid at (Bank Rate + 5%).

Liquidity Adjustment Facility (LAF)

 Liquidity Adjustment Facility (LAF) allows banks to borrow money from the
RBI through repurchase agreements (repos) or to make loans to RBI through reverse
repo agreements.
 It is aimed to aid banks in adjusting the day-to-day mismatches in liquidity.
 It comprises the following 2 sub-instruments:

Repo Rate (Re-purchase Option Rate)

Repo Rate is the rate of interest at which the RBI provides short-term loans to
SCBs against approved securities.

Reverse Repo Rate

Reverse Repo Rate is the rate of interest at which the RBI borrows funds from the
SCBs. In other words, it is the rate at which SCBs park their excess funds with the RBI for a
short period of time.

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Marginal Standing Facility (MSF)

 This facility was introduced by the RBI in 2011 on the basis of the recommendations
of the Narasimhan Committee on banking sector reforms.
 Under this, all the SCBs having current accounts with the RBI can avail of
an overnight short-term loan of up to 1% of their Net Demand and Time Liabilities
(NDTL) outstanding at the end of the second preceding fortnight, against Government
Securities as collateral.
 This facility is like the penal rate at which banks can borrow money from the central
bank over and above what is available to them through the LAF window.
 MSF being a penal rate, the rate of interest under MSF is 25 basis points (0.25%)
above the Repo Rate.
 Amounts in multiples of ₹1 crore (with a minimum amount of ₹1 crore) can be
accessed through MSF.

Comparison among MSF, Repo Rate and Reverse Repo Rate

MSF represents the upper band of the interest corridor, and Reverse Repo Rate is
the lower band. The Repo Rate stands in the middle and acts as an anchor rate.

Open Market Operations (OMOs)

 Open Market Operations (OMOs) refer to the buying and selling of government
securities by RBI to regulate the short-term money supply.
 If RBI wants to induce liquidity or more funds in the system, it will buy
government securities and inject funds into the system.
 On the other hand, if the RBI, wants to curb the amount of money in the system, it
will sell government securities to the banks thereby reducing the amount of cash that
banks have.

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Market Stabilization Scheme (MSS)

 Market Stabilization Scheme (MSS) refers to intervention by the RBI to withdraw

excess liquidity by selling government securities in the economy.
 Under it, the RBI sells government bonds on a general basis depending upon the
volume of excess liquidity in the system. Here bonds go to financial institutions and
money goes back to the RBI.
o This withdrawal of excess liquidity is called sterilization.
 The securities issued under the MSS are, basically, government bonds and are called
Market Stabilization Bonds (MSBs).

Term Repos

 Since October 2013, the RBI has introduced Term Repos (of different tenors, such as
7/14/28 days), to inject liquidity over a period that is longer than overnight.
 The aim of Term Repo is to help develop an inter-bank money market, which in turn
can set market-based benchmarks for the pricing of loans and deposits, and through
that improve the transmission of monetary policy.

Qualitative Tools of Monetary Policy

Major instruments coming in this category are explained below

Margins Requirements

 Margin refers to the difference between the value of securities offered for loans and
the value of loans actually granted.
 If RBI wants to control the flow of credit to a particular sector, it fixes a high margin
for that sector. As a result, customers will take lesser loans for that sector.

Consumer Credit Regulation

 Credit made available by commercial banks (installments) for the purchase of

consumer durables is known as consumer credit.
 If there is excess demand for certain consumer durables leading to their high prices,
the RBI reduces consumer credit by:
o increasing down payment, and/or
o reducing the number of installments of repayment of such credit.

Moral Suasion

 Moral Suasion means persuasion and request.

 RBI makes the banks adhere to the policy and directives through persuasion or
pressure in order to maintain a certain level of money supply in the economy.

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Direct Action
The RBI takes direct action such as refusing to rediscount the bills or charging penal interest
rates, etc when a commercial bank does not co-operate with the central bank in achieving its
desirable objectives.

Rationing of Credit or Credit Ceiling

Under this, the RBI fixes a ceiling on the amount of loans that can be granted by SCBs. As
a result, SCBs tighten in advancing loans to the public.

Priority Sector Lending

Under this, the RBI prescribes the banks to provide a specified portion of the bank lending to
a few specific sectors like agriculture and allied activities, micro and small enterprises, poor
people for housing, etc.

Significance of Monetary Policy

 It plays an important role in maintaining price stability and ensuring economic

growth.
 By maintaining price stability, it helps manage inflation.
 It shapes variables like Consumption, Savings, Investment, and capital formation.
 An increase in the money supply helps to stimulate the business sector, which also
helps to create more jobs.
 By controlling the money supply in the market, it helps balance Currency Exchange
Rates.

Limitations of Monetary Policy in India

 Unfavorable Banking Habits: People in India prefer to make use of cash rather than
make transactions through banks. This reduces the credit creation capacity of the
banks.
 Underdeveloped Money Market: The weak money market limits the coverage as
well as the efficient working of the RBI’s policy actions.
 Existence of Black Money: Black money is not recorded since the borrowers and
lenders keep their transactions secret. Consequently, the supply and demand of the
money also do not remain as desired.
 Conflicting Objectives: Ensuring economic development requires expansionary
policy measures, whereas curbing inflation requires contractionary policy measures.
Striking a proper balance between these two objectives becomes difficult.
 Limitations of Monetary Instruments: There are several kinds of interest rates in
India. Influencing them all appropriately becomes very difficult as most of the
monetary policy instruments available in India have some or other kinds of
limitations.

Monetary Policy Transmission

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  It refers to the process by which the Central Bank’s actions to control the money
supply (such as a change in the Repo Rate) are transmitted to the final objectives of
stable inflation and growth.
 It involves the entire process starting from the change in the Policy Rate ( such as the
Repo Rate) by the RBI, its response in the financial markets, and the ultimate effect
on businesses and households.
 As the Repo Rate brings changes in the market interest rate, the Repo Rate
Channel is often referred to as the Interest Rate Channel of Monetary Policy
Transmission.

Liquidity Trap

 Liquidity Trap is an adverse economic situation that occurs when consumers and
investors prefer to hold onto their cash rather than spend or invest them, even when
interest rates are low.
 A Liquidity trap emerges when interest charges are nil or during a downturn. In such a
situation, people are afraid to spend money, hence they feel safe to hold onto the cash.
As a result, even expansionary policy measures fail to increase the interest rate,
income, and economic growth.

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Quantitative Easing (QE)

 Quantitative Easing (QE) refers to the Central Bank’s action of purchasing securities
from the open market to reduce interest rates and increase the money supply.
 It is aimed to create new bank reserves, providing banks with more liquidity, and
encouraging lending and investment.

Sterilization

It refers to the process by which the RBI takes away money from the banking system to
neutralize the fresh money that enters the system.

Inflation Targeting

 It is a central banking policy that revolves around adjusting monetary policy to

achieve a specified annual rate of inflation.
 The principle of inflation targeting is based on the belief that long-term economic
growth is best achieved by maintaining price stability, and price stability is achieved
by controlling inflation.
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  Broadly, there are two types of Inflation Targeting:

Strict Inflation Targeting

Under Strict Inflation Targeting, the central bank is only concerned about keeping inflation as
close to a given inflation target as possible, and nothing else.

Flexible Inflation Targeting

Under Flexible Inflation Targeting, apart from keeping inflation within the target range, the
central bank is also concerned about other things, such as the stability of interest rates,
exchange rates, output, and employment.

Monetary Policy in India plays a pivotal role in stabilizing the economy and fostering a
conducive environment for sustainable growth. The dynamic nature of the global economy,
internal structural constraints, and the complex interplay between fiscal and monetary
policies mean that constant vigilance and adaptability are required to navigate the path ahead.
As India continues to develop and integrate further into the global economy, the formulation
and implementation of monetary policy will remain a key area of focus for policymakers.

FAQs on Monetary Policy in India

Who Controls Monetary Policy in India?

The RBI Act of 1934 explicitly mandates the Reserve Bank of India (RBI) with
the responsibility of controlling the monetary policy for the country.

Who formulates Monetary Policy in India?

At present, monetary policy in India is formulated by the Monetary Policy Committee
(MPC), which was set up by an amendment in the RBI Act of 1934 through the Finance Act
of 2016.

What is the Function of Monetary Policy in India?

Its most important function is to control the supply of money in the market. Along with this,
it also ensures the growth of the economy and price stability.

What is the Monetary Policy Framework Agreement?

It is an agreement signed between the RBI and the Center in 2015, the primary objective of
which is to ensure price stability while accelerating economic growth.

GS - 3

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