"RBI holds policy rate, prioritises growth amid rising inflation risks"
Flexible Inflation Targeting (FIT)
framework mandating a 4% CPI target ±2%, established under Section 45ZA, RBI Act, 1934
Monetary Policy Committee (MPC)
six-member statutory body setting India's policy repo rate by majority vote
India's monetary policy framework was fundamentally restructured when the Flexible Inflation Targeting (FIT) framework was formalised 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 reduced 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 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 policy repo rate remains the primary instrument through which the MPC signals its stance, influencing the cost of credit across the economy via the banking transmission channel, as described in the NCERT framework of money creation and central bank tools.
The MPC is a six-member statutory body: three members from the RBI (including the Governor, who chairs it) and three external members appointed by the central government. Decisions are taken by majority vote; the Governor holds a casting vote in the event of a tie. The MPC meets at least four times a year and its decisions are binding — a departure from the earlier advisory role of internal committees. The stance adopted by the MPC — whether accommodative, neutral, or withdrawal of accommodation — signals the directional bias of future rate decisions, independent of the rate decision itself.
The distinction between headline CPI inflation and core inflation is analytically central to monetary policy decisions. Headline CPI in India assigns approximately 46% weight to food and beverages, making it highly sensitive to supply-side shocks such as monsoon deficits, vegetable price spikes, or crude oil volatility. …
In India, which one of the following is responsible for maintaining price stability by controlling inflation?
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?
Indian Government Bond Yields are influenced by which of the following?
1.Actions of the United States Federal Reserve
2.Actions of the Reserve Bank of India
3.Inflation and short-term interest rates
Select the correct answer using the code given below.
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.
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 remains outside the tolerance band for three consecutive quarters, the RBI must submit a formal report to the government.
3.The Monetary Policy Committee's decisions are binding on the RBI.
Which of the statements given above is/are correct?
Which of the following best explains why the RBI may choose not to raise the policy repo rate even when headline CPI inflation is rising?
Consider the following statements about the Monetary Policy Committee (MPC) of India:
1.The MPC has six members, of whom three are from the RBI and three are appointed by the central government.
2.The RBI Governor chairs the MPC and holds a casting vote in the event of a tie.
3.The MPC is required to meet at least six times in a financial year.
Which of the statements given above are correct?
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