The Reserve Bank of India (RBI) was established in 1935 and announced its first monetary policy by fixing the bank rate and cash reserve ratio (CRR). As 2025 marks 90 years since this landmark event, it highlights the evolution of India’s monetary policy framework over the decades.
What is Monetary Policy?
Monetary policy refers to the process by which the central bank manages the supply of money in the economy to achieve key objectives such as:
- Price stability
- Economic growth
- Financial stability
Instruments of Monetary Policy
Quantitative Tools: Affect the overall money supply in the economy
- Repo Rate
- Reverse Repo Rate
- Statutory Liquidity Ratio (SLR)
- Marginal Standing Facility (MSF)
Qualitative Tools: Influence lending behavior of banks
- Moral Suasion
- Direct Action
Types of Monetary Policy
- Contractionary Monetary Policy (Tight Policy) – Increases interest rates, limits money supply, and reduces inflation.
- Expansionary Monetary Policy – Decreases interest rates, increases money supply, and boosts borrowing and consumer spending.
Current Monetary Policy Framework in India
- Before 2016: The RBI Governor solely formulated India’s monetary policy.
- After 2016: Finance Act, 2016 amended the RBI Act, 1934, introducing the Monetary Policy Committee (MPC) and Flexible Inflation Targeting (FIT) was formally adopted.
Monetary Policy Committee (MPC)
- Members: Six members (3 from RBI, 3 appointed by the Central Government).
- Chairman: RBI Governor (ex officio).
- Voting: Each member has one vote; in case of a tie, the RBI Governor casts the deciding vote.