"RBI MPC holds repo rate steady amid food and fuel inflation risks"
Repo Rate
rate at which RBI lends overnight funds to commercial banks; primary monetary policy instrument
Flexible Inflation Targeting (FIT)
framework mandating 4% CPI ±2% as India's monetary policy anchor since 2016
India's monetary policy framework was fundamentally restructured when the Flexible Inflation Targeting (FIT) framework was established through an amendment to the Reserve Bank of India Act, 1934, specifically under Section 45ZA, enacted in 2016. Before this reform, the RBI operated under a multiple-indicator approach — tracking a wide array of variables without a clearly defined nominal anchor — which eroded policy credibility and made inflation expectations difficult to anchor. The FIT framework replaced this with a single, transparent target: 4% CPI inflation, with a tolerance band of ±2 percentage points (i.e., 2%–6% is acceptable). This medium-term target is set by the central government in consultation with the RBI, embedding a cooperative yet accountable relationship between fiscal and monetary authorities.
A critical accountability mechanism underpins the framework: if inflation remains outside the 2%–6% band for three consecutive quarters, the RBI is obligated to submit a formal report to the government explaining the causes and the remedial steps it proposes. This transforms the target from aspiration into institutional commitment. The framework also institutionalised the Monetary Policy Committee (MPC) as the decision-making body, replacing the earlier system where the RBI Governor alone set rates — a change that introduced collective deliberation and reduced the concentration of discretionary authority. The MPC is a six-member statutory body: three members from the RBI (including the Governor, who chairs it) and three external government-appointed members. Decisions are by majority vote; the Governor holds a casting vote in the event of a tie.
The policy repo rate — the rate at which the RBI lends overnight funds to commercial banks — is the MPC's primary instrument for signalling the monetary policy stance. When the MPC raises the repo rate, borrowing becomes costlier, compressing demand and theoretically moderating inflation. When it cuts the rate, credit becomes cheaper, stimulating investment and consumption. The MPC also signals its stance — whether it is accommodative (biased toward cuts), neutral (data-dependent, no directional bias), or withdrawal of accommodation / restrictive (biased toward hikes). The stance communicates the committee's forward-looking intent even when the rate itself is held unchanged.
A structurally important limitation of this framework is that monetary policy is best suited to addressing demand-pull inflation — where excess money chasing goods drives prices up. India's inflation, however, is frequently driven by supply-side shocks: monsoon failures, kharif and rabi crop shortfalls, and global commodity price spikes. …
Consider the following statements:
1.The Governor of the Reserve Bank of India (RBI) is appointed by the Central Government.
2.Certain provisions in the Constitution of India give the Central Government the right to issue directions to the RBI in public interest.
3.The Governor of the RBI draws his power from the RBI Act.
Which of the above statements are correct?
In India, as the 'Lender of Last Resort', the function of the central bank in its usual course normally includes which of the following?
1.Lending to trade and industry bodies when they fail to obtain credit from other sources
2.Providing liquidity to the banks having a temporary crisis
3.Lending to governments to finance budgetary deficits
Select the correct answer using the code given below.
In India, which one of the following is responsible for maintaining price stability by controlling inflation?
The terms 'Marginal Standing Facility Rate' and 'Net Demand and Time Liabilities', sometimes appearing in news, are used in relation to
Consider the following statements regarding India's Flexible Inflation Targeting (FIT) framework:
1.The inflation target is set by the RBI independently without government involvement.
2.If CPI inflation breaches the tolerance band for three consecutive quarters, the RBI must submit a formal report to the government.
3.The Monetary Policy Committee has six members, with the RBI Governor holding a casting vote in case of a tie.
Which of the above statements is/are correct?
Which of the following best explains why the RBI's Monetary Policy Committee may choose to hold the repo rate unchanged even when headline CPI inflation rises?
Assertion (A): A rise in headline CPI inflation does not necessarily call for an immediate increase in the policy repo rate.
Reason (R): Core inflation, which excludes food and fuel, is a better indicator of broad-based demand-driven price pressures that monetary policy can effectively address.
Select the correct answer:
With reference to India's Consumer Price Index (CPI), which of the following statements is correct?
Consider the following statements about the 'second-round impact' of inflation:
1.It refers to the initial price rise in food and fuel commodities.
2.It occurs when higher input costs feed into broader wage demands and price-setting behaviour, entrenching inflation.
3.It is a key risk that the MPC monitors when deciding whether to tighten monetary policy despite subdued core inflation.
Which of the above statements is/are correct?
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