Monetary Policy of RBI


Fincrif India

Aug 7

06:05 AM

The process through which a country's monetary authority, typically the central bank or currency board, regulates either the cost of short-term borrowing or the cash supply, focusing on inflation or the loan fee to ensure value stability and widespread confidence in the currency.

Indian monetary policy and the RBI's monetary policy During your economics classes, you might have come across the phrase "Monetary Policy of RBI." While reading about the RBI's duties, many of you may have run across it. Some of you may have already come across this term in the editorials of The Hindu and the Economic Times since we strongly advise reading these publications regularly.

What, then, is monetary policy? And who makes it? We require it, but why? What goals does India's RBI have for its monetary policy? You might be curious about the answers to a lot of questions!

The Reserve Bank of India, which serves as the nation's central bank, is in charge of developing monetary policy in India. Therefore, it is crucial that those preparing for the RBI Grade B Exam understand it in great detail!

What is Monetary Policy ? 

The process through which a country's monetary authority, typically the central bank or currency board, regulates either the cost of short-term borrowing or the cash supply, focusing on inflation or the loan fee to ensure value stability and widespread confidence in the currency. Additional objectives of monetary policy include:

  • to help keep the GDP stable, 

  • to achieve and sustain a low unemployment rate, and 

  • to keep stable exchange values with other currencies.

The Reserve Bank of India formulates monetary policy in India. As a result, it is also known as RBI's Monetary Policy. 

Types of Monetary Policies

Explicit Monetary Policy 

The monetary authority of the nation, which is typically the central bank of the nation, can choose an expansionary policy that aims to boost economic growth and expand economic activity if the country is experiencing high unemployment rates, particularly during a crisis period like a slowdown or a recession. 

In order to encourage spending in the market and encourage money-saving, the succeeding monetary authority frequently reduces interest rates for consumers as part of expansionary monetary policy. In an effort to spur consumer and investment expenditure, it results in an increase in the amount of money available on the market.

Contractionary Monetary Policy 

When a central bank uses the instruments of monetary policy to combat inflation, that practice is known as contractionary monetary policy. The bank must stifle economic development since inflation is a symptom of an overheated economy, making it necessary to do so. So, despite the possibility of decreasing economic development and raising unemployment, paradoxical monetary policy is frequently needed to keep inflation under control.

Monetary Policy of RBI | Monetary Policy in India

The Reserve Bank of India has the authority to create India's monetary policy. Because of this, it is also known as RBI's Monetary Policy. Under the terms of the RBI Act of 1934, the RBI has been given this duty. The money supply, the accessibility of credit, and interest rates are all governed by RBI's monetary policy. Let's examine the fundamental purpose of monetary policy as well as the tools used by the Reserve Bank of India to control the money supply and accomplish the goals of the economic plan.

The primary objective of RBI's monetary policy

Maintaining price stability while keeping in mind the goals outlined in the economic plan is the major purpose of the RBI's monetary policy. In order to achieve sustained growth, price stability is crucial. Inflation needs to be controlled in order to ensure price stability. The RBI uses a number of monetary policy tools to keep inflation under control. Let's take a quick look at the tools that the RBI uses to implement monetary policy.

Monetary Policy Instruments | Monetary Policy of RBI

The implementation of monetary policy in India is aided by a number of direct and indirect monetary policy instruments. Let's quickly go over each of them:

Repo Rate: The repo rate is the price at which the RBI lends commercial banks short-term loans (less than 90 days).

Reverse Repo Rate: The rate at which the RBI retains the additional deposits made by all banks inside itself is known as reverse repo. 

Marginal Standing Facility (MSF): The margin at which banks receive overnight loans from the RBI is known as the marginal standing facility (MSF). Only 2% of the NTDL (Net Demand and Time Liabilities) may comprise it. It always exceeds the repo rate by 1%, or 100 basis points.

Bank Rate: The rate at which the RBI provides commercial banks with long-term loans (lasting more than 90 days) is known as the "bank rate."

Cash Reserve Ratio (CRR): Every bank is required to maintain a cash reserve ratio (CRR) with the RBI as a percentage of its overall deposit. Cash only is acceptable as payment. With regard to this reserve money, the RBI does not pay any interest. From 0% to 15% is possible. In its monetary policy, RBI makes the CRR announcement. 

Statutory Liquidity Ratio (SLR): A bank is required to maintain a certain portion of its total deposits to itself, known as the Statutory Liquidity portion (SLR). Both cash and liquid assets, such as gold, foreign currency, government bonds, etc., are acceptable as payment methods.

According to the RBI's monetary policy announcement, it may range from 0 to 40%.   

Open Market Operations (OMO): This term describes the exchange of government securities between banks and the RBI. 


So there you have it—a quick summary of RBI's monetary policy in India. This subject needs to be better understood because it will be crucial to your performance in the RBI Grade B Prelims, Mains, and Interview rounds. At regular intervals, the RBI sets these rates. You should therefore stay up with the most recent vital indicators because you might be asked about them in the exam.  

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