Monetary Policy in India is one of the important instruments that is used by the Government and the Reserve Bank of India to maintain economic stability. Under this policy, it refers to the strategies and measures that are undertaken to regulate the supply of money, credit, and interest rates. 

Monetary policy helps in maintaining a well-balanced economy. It helps in controlling inflation and promoting economic growth. Thereby ensures financial stability and also supports employment generation. Below is the complete information related to the Monetary policy and its related aspects. 

What is Monetary Policy?

Monetary policy is a critical economic tool used by the Reserve Bank of India to regulate the supply of money and credit in the economy. It involves controlling liquidity, interest rates, and banking operations to achieve macroeconomic objectives. These objectives are such as price stability, growth, and financial stability. 

By influencing borrowing and lending through instruments like the repo rate, reverse repo rate, and bank rate, monetary policy in India ensures balanced economic development. Both quantitative and qualitative tools of monetary policy are applied to manage inflation, support investment, and maintain the smooth functioning of the financial system.

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Objectives of Monetary Policy in India

Refer to the points below to know about the objectives that are being served by monetary policy in India:

• Price Stability: Maintaining inflation within target limits to protect consumers’ purchasing power. Stable prices are essential for economic planning and confidence in the financial system.
• Economic Growth: Ensuring that sufficient credit is available for productive sectors. Through which it can support investment, industrial expansion, and infrastructure development.
• Employment Generation: By encouraging investment and industrial growth, monetary policy indirectly supports job creation.
• Financial Stability: Safeguarding the banking system and financial institutions from liquidity crises. Thereby preventing disruptions in the economy.
• Balance of Payments Management: Controlling money supply and interest rates helps in maintaining a stable exchange rate. Hence, assisting in managing foreign capital flows. 

Also Read: Reserve Bank Of India

Types of Monetary Policy in India

There are two major types of Monetary policy in India. These policies are made depending on the economic conditions of the Indian marketplace and economy. 

1. Expansionary Monetary Policy

Expansionary monetary policy is used during periods of slow economic growth or recession. It aims to increase the money supply and lower interest rates to encourage borrowing, investment, and consumption. Key features of Expansionary Monetary Policy in India include: 

• Reduction in repo rate to make borrowing cheaper for banks.
• Lower reverse repo rate to discourage banks from parking funds with the RBI.
• Reduced Cash Reserve Ratio (CRR) to increase liquidity.

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2. Contractionary Monetary Policy

Contractionary monetary policy is used when inflation is high. It aims to reduce the money supply to control price rise. Key features of Contractionary Monetary Policy in India include:

• Increase in repo rate and bank rate to make borrowing costlier.
• Increase in CRR to absorb excess liquidity from the system.

RBI Monetary Policy Committee

The RBI monetary policy committee was established in 2016 to improve transparency and decision-making. The MPC consists of six members, including three from the RBI and three appointed by the government. The committee meets every two months to review economic indicators such as inflation, growth, and liquidity conditions. Currently, the RBI Monetary Policy Committee consists of: 

• Governor of the Reserve Bank of India – Chairperson, ex officio – Sanjay Malhotra
• Deputy Governor of the Bank in charge of monetary policy – Poonam Gupta
• Executive Director of the Bank in charge of monetary policy – Rajiv Ranjan
• Ram Singh, Director, Delhi School of Economics, University of Delhi.
• Saugata Bhattacharya, Economist.
• Nagesh Kumar, Director and Chief Executive, Institute for Studies in Industrial Development, New Delhi.

The primary function of the MPC is to decide:

RBI Monetary Policy and Its Role

The RBI monetary policy is the framework through which India’s central bank regulates financial activity in the country. The Reserve Bank of India, established in 1935, functions as the monetary authority and is responsible for formulating policies to maintain price stability, ensure credit flow, and support economic growth.

The key roles of the RBI in monetary policy include:

Quantitative And Qualitative Tools Of Monetary Policy

The RBI uses a combination of quantitative and qualitative tools of monetary policy. These tools help in regulating the money supply and credit.

Quantitative Tools 

Quantitative tools aim to control the total money supply in the economy. These include:

1. Repo Rate: The rate at which commercial banks borrow money from the RBI. Lowering the repo rate encourages borrowing and investment.
2. Reverse Repo Rate: The rate at which banks park funds with the RBI. A higher reverse repo rate absorbs liquidity from the system.
3. Cash Reserve Ratio (CRR): A portion of banks’ deposits that must be kept with the RBI. Higher CRR reduces credit availability.
4. Bank Rate: The rate at which RBI lends to commercial banks without collateral. It influences long-term lending rates.
5. Open Market Operations (OMO): Buying or selling government securities to adjust liquidity in the financial system.

Qualitative Tools

Qualitative tools are aimed at directing credit to specific sectors and controlling its quality. These include:

1. Credit Rationing: Limiting credit to non-priority sectors.
2. Moral Suasion: Persuading banks to follow desired lending practices.
3. Margin Requirements: Controlling the amount of loan relative to the value of collateral.
4. Credit Guidelines: Directing banks to support sectors such as agriculture, small businesses, and exports.

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What is Repo Rate, Reverse Repo Rate, and Bank Rate?

It is important to understand what is repo rate, reverse repo rate, and bank rate. Because they directly affect borrowing, lending, and investment:

• Repo Rate: A Lower repo rate reduces borrowing costs, encouraging spending and investment.
• Reverse Repo Rate: A Higher reverse repo absorbs excess money from banks, controlling inflation.
• Bank Rate: Influences long-term borrowing; changes in bank rate affect housing loans, corporate loans, and other long-term finance.

Latest Monetary Policy of India 

The latest monetary policy of India was announced by the RBI in August 2025. Key highlights include:

• Repo Rate: Maintained at 5.5%, indicating a neutral stance to support growth while controlling inflation.
• Reverse Repo Rate: Kept unchanged at 4.0% to manage liquidity effectively.
• Inflation Target: Maintained at 4% with a tolerance band of 2-6%.
• Growth Outlook: The Indian economy is projected to grow at 6.2% for 2025-26.

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