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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.
Related Terms
Mains GS Relevance
GS Paper 3
Economy, Environment, S&T, Security
Subject
Economy
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