Key Terms & Concepts — UPSC Mains
Monetary Policy
GS3
"RBI's use of interest rates and money supply to control inflation and support economic growth"
Definition
Monetary policy refers to the actions undertaken by a central bank (RBI in India) to control the money supply, credit availability, and interest rates in an economy. The primary objective under the current framework is inflation targeting — maintaining CPI inflation at 4% (±2%). The Monetary Policy Committee (MPC) meets every two months to decide on the repo rate.
⭐ Significance for UPSC
A frequently tested topic in GS3 (Economy). Questions appear on inflation targeting, repo rate changes, MPC composition, transmission mechanism, and the balance between growth and inflation control.
Key Points
- 1 MPC has 6 members — 3 RBI officials (including Governor) + 3 external members appointed by Govt.
- 2 Repo Rate — rate at which RBI lends to commercial banks (key policy rate)
- 3 Reverse Repo Rate — rate at which RBI borrows from commercial banks
- 4 CRR (Cash Reserve Ratio) — portion of deposits banks must keep with RBI
- 5 SLR (Statutory Liquidity Ratio) — portion banks must maintain in liquid assets
- 6 Inflation targeting framework adopted in 2016 under FRBM Amendment
Example / Context
When RBI raises the repo rate, borrowing becomes expensive for banks, which pass this on as higher EMIs, reducing consumer spending and cooling inflation.
Mains GS Relevance
GS Paper 3
Economy, Environment, S&T, Security
Subject