Monetary Policy- is the policy adopted by the central bank (in India, the Reserve Bank of India – RBI) to control money supply and achieve macroeconomic objectives like inflation control, economic growth, and currency stability.
Objectives of Monetary Policy
- Control inflation and ensure price stability
- Promote economic growth and employment
- Maintain stability in the financial system
- Manage liquidity in the economy
- Stabilize exchange rates and ensure adequate credit flow
Types of Monetary Policy
- Expansionary Monetary Policy: Increases money supply to boost economic growth (used during slowdown or recession)
- Contractionary Monetary Policy: Decreases money supply to control inflation (used when inflation is high)
Tools of Monetary Policy
1. Quantitative Tools (General Tools)
- CRR (Cash Reserve Ratio): Percentage of total deposits banks must keep with the RBI in cash. High CRR = Less lending capacity
- SLR (Statutory Liquidity Ratio): Percentage of deposits banks must maintain in the form of gold/government securities
- Repo Rate: The rate at which RBI lends short-term funds to commercial banks. Lower Repo = Cheaper loans
- Reverse Repo Rate: The rate at which RBI borrows from banks. Used to absorb excess liquidity
- Bank Rate: Long-term lending rate from RBI without repurchase agreement
- MSF (Marginal Standing Facility): Emergency borrowing facility for banks above SLR limits
2. Qualitative Tools (Selective Tools)
- Credit Rationing: Limiting credit to certain sectors
- Margin Requirements: Setting limits on loan amount against security
- Moral Suasion: Informal persuasion by RBI to banks to follow certain policies
Monetary Policy Committee (MPC)
- Formed under the RBI Act, 1934 (amended in 2016)
- 6 members: 3 from RBI (including Governor), 3 appointed by Government of India
- Governor of RBI is the ex-officio Chairperson
- Decides the benchmark Repo Rate every two months
Inflation Targeting
- India follows a flexible inflation targeting framework
- Target: 4% CPI (Consumer Price Index) with ±2% tolerance (i.e., 2% to 6%)
- Set by the Government in consultation with RBI
Recent Monetary Policy Trends (2025)
- RBI has maintained a focus on inflation control amidst global uncertainties
- Repo Rate as of July 2025: 6.50% (subject to update)
- Liquidity adjustment to support economic recovery while containing inflation
Conclusion: Understanding Monetary Policy is crucial for banking exams, as it plays a vital role in managing the economy. Focus on tools, objectives, the MPC structure, and recent RBI decisions for your preparation.