Monetary policy in India aims to maintain price stability, economic stability, and maximize employment through tools like bank rate, cash reserve ratio, open market operations, and repo/reverse repo rates. The Reserve Bank of India is responsible for formulating and implementing monetary policy through its monetary policy committee. India has adopted flexible inflation targeting as its monetary policy framework, with a target of 4% inflation with a 2-6% tolerance band. The Reserve Bank is required to provide reasons and remedial measures if inflation is outside the tolerance band for three consecutive quarters.

1. Jasmine Kaur
Assistant Professor
RGNUL

2.  Monetary policy refers to the policy of the central bank with regard to
the use of monetary instruments under its control to achieve the well-
defined objectives
 It is the control of availability, cost and the use of money and credit
 The Reserve Bank of India is vested with the responsibility of
conducting the monetary policy in India
 The Reserve Bank’s monetary policy department assists the
monetary policy committee in formulating the monetary policy

3. Price Stability
Economic Stability
Maximisation of Employment
Economic Growth
Stabilisation of Money Market

4. Bank rate
Open market operations (OMOs)
Cash reserve ratio (CRR)
Liquidity adjustment facility-repo rate and
reverse repo rate

5. Marginal requirements
Regulation of consumer credit
Credit rationing
Moral suasion
Publicity
Direct action

6. Goals of monetary policy
Tools and instruments
Operating targets
Intermediate targets

7.  It has evolved in response to varying
macroeconomic situations over a period of
time
 In the initial years of establishment of RBI,
liquidity was mainly regulated through the
instruments of OMOs, bank rate and CRR

8.  Soon after independence, the central bank
coordinated with the planned development
process of the nation
 The period of 1970s till mid 1980s was
marked by monetization of fiscal deficit and
changes in CRR were undertaken to reduce
inflationary pressures

9.  RBI began to deemphasize the role of monetary aggregates
and implemented a Multiple Indicator Approach (MIA) to
monetary policy in 1998
 The MIA approach was developed on the basis of
recommendations of RBI’s working group on money supply
 The MIA approach encompassed all economic variables such
as money, credit, output, inflation rate, interest rate, etc. which
helped in the formulation of monetary policy

10.  The significance of focusing on inflation was first highlighted in
the Report of the Committee on Financial Sector Reforms
2009
 Dr. Raghuram Rajan set up an expert committee in 2013 to
review and strengthen the monetary policy framework
 The Flexible Inflation Targeting (FIT) was formally adopted in
India with the signing of monetary policy framework
agreement between GOI and RBI in 2015

11.  The RBI Act 1934 was amended to provide a statutory basis for the
implementation of FIT framework in 2016
 The amended RBI act provides that the central government shall, in
consultation with the central bank determine the inflation target in terms of
CPI, once in every five years
 Target for the period from August 5, 2016 to March 31, 2021- 4% CPI
inflation with the upper tolerance limit of 6% and lower tolerance limit of 2%
 The MPC kept the inflation target unchanged at 2-6 percent for the next five
fiscal years i.e. 2021-2026

12.  A breach of tolerance level for three consecutive quarters will
constitute a failure of monetary policy
 In case RBI fails to meet the target, RBI is required to-
 provide reasons for the failure
 suggest remedial measures and
 provide expected time to return inflation to the target

13.  The amended RBI Act, 1934 provides for a statutory
framework for a six-member Monetary Policy
Committee (MPC) to be constituted by central
government
 With the formation of MPC, the Technical Advisory
Committee ceased to exist
 Members of MPC-RBI’s Governor, Deputy Governor of
the Bank, One officer to be nominated by central board
and three external members

14. Instrument Current Rate
CRR 3%
SLR 18%
Repo Rate 4%
Reverse Repo Rate 3.35%
Bank Rate 4.25%
Marginal Standing Facility Rate 4.25%

15. THANK YOU