What is Monetary Policy?
Historical Background
Key Points
10 points- 1.
Primary objective: Maintain price stability (inflation control) while keeping in mind the objective of growth.
- 2.
Key policy tools (quantitative): Repo Rate, Reverse Repo Rate, Marginal Standing Facility (MSF), Bank Rate, Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Open Market Operations (OMO).
- 3.
Key policy tools (qualitative): Moral Suasion, Credit Rationing, Direct Action.
- 4.
Inflation targeting framework: Mandated to keep Consumer Price Index (CPI) inflation at 4% with a +/- 2% tolerance band (2-6%).
- 5.
Formulated and implemented by the six-member Monetary Policy Committee (MPC), which meets at least four times a year.
- 6.
Impacts credit availability, investment, consumption, exchange rates, and overall aggregate demand in the economy.
- 7.
Can adopt an 'accommodative' stance (low rates, high liquidity to support growth) or a 'tight/hawkish' stance (high rates, low liquidity to curb inflation).
- 8.
Aims to manage liquidity in the banking system through the Liquidity Adjustment Facility (LAF).
- 9.
Influences capital flows, financial market stability, and the cost of borrowing for businesses and individuals.
- 10.
Monetary policy transmission refers to how changes in policy rates affect market rates and the real economy.
Visual Insights
Monetary Policy Framework
Illustrates the key components and tools of monetary policy used by the Reserve Bank of India (RBI).
Monetary Policy
- ●Objectives
- ●Tools
- ●Committee
Recent Developments
5 developmentsShifted to an accommodative stance during the COVID-19 pandemic to support economic recovery and growth.
Subsequently tightened policy and raised interest rates to combat elevated inflation post-pandemic and due to global commodity price surges.
Increased use of forward guidance as a communication tool to manage market expectations.
Focus on fine-tuning liquidity management operations (e.g., Variable Rate Repo/Reverse Repo auctions).
Debate on the effectiveness of monetary policy in addressing supply-side inflation shocks.
This Concept in News
2 topicsStable CPI Index Signals Potential Pause in Interest Rate Hikes
17 Feb 2026The news of a stable CPI index highlights the role of monetary policy in maintaining price stability. A stable CPI suggests that the RBI's previous monetary policy actions may have been effective in controlling inflation. This news applies the concept of monetary policy in practice by showing how inflation data influences the RBI's decisions on interest rates. It reveals that reduced volatility in the CPI can provide the RBI with greater confidence in its inflation forecasts, potentially leading to a more patient approach to monetary policy. The implications of this news are that a pause in interest rate hikes could support economic growth and investment. Understanding monetary policy is crucial for analyzing this news because it provides the framework for understanding how the RBI manages inflation and its impact on the economy. Without this understanding, it would be difficult to assess the significance of a stable CPI index and its potential consequences.
RBI Boosts MSME Lending: Collateral-Free Loans Doubled to ₹20 Lakh
7 Feb 2026The news highlights the role of monetary policy in supporting specific sectors of the economy, in this case, MSMEs. It demonstrates how the RBI uses targeted measures to address specific credit needs. This news applies the concept of monetary policy in practice by showing how the RBI adjusts lending conditions to influence economic activity. It reveals the RBI's focus on promoting financial inclusion and supporting small businesses. The implications of this news are that it could lead to increased investment and job creation in the MSME sector. Understanding monetary policy is crucial for analyzing this news because it provides the context for understanding why the RBI took this action and what its intended effects are. Without understanding monetary policy, it would be difficult to assess the potential impact of this measure on the economy.