"RBI MPC holds repo rate at 5.25% amid global uncertainty and inflation concerns"
Repo Rate
rate at which RBI lends overnight funds to commercial banks via repurchase agreements
Flexible Inflation Targeting (FIT)
framework targeting 4% CPI ±2%, established by 2016 RBI Act amendment
India's monetary policy framework underwent a structural transformation in 2016 when the government amended the Reserve Bank of India Act, 1934 to formally institute a Flexible Inflation Targeting (FIT) regime. Under this framework, the central government, in consultation with the RBI, sets a medium-term inflation target of 4% CPI (Consumer Price Index), with a tolerance band of ±2 percentage points — meaning inflation between 2% and 6% is considered acceptable. The FIT framework replaced the earlier multiple-indicator approach, which lacked a clear nominal anchor and weakened policy credibility.
The institutional mechanism for achieving this target is the Monetary Policy Committee (MPC), a six-member body constituted under the RBI Act. Three members are RBI officials — the Governor (who chairs the MPC and holds a casting vote), the Deputy Governor in charge of monetary policy, and one officer nominated by the Central Board. The remaining three are external members appointed by the central government. The MPC meets at least four times a year and decides the policy repo rate — the rate at which the RBI lends overnight funds to commercial banks — as its primary instrument. A critical accountability provision requires the RBI to submit a formal report to the government if inflation remains outside the 2–6% band for three consecutive quarters, explaining the reasons and proposed remedial measures.
The repo rate works through the transmission mechanism: when the RBI raises the repo rate, borrowing becomes costlier for banks, which in turn raise lending rates, dampening credit demand and consumer spending — thereby cooling inflation. Conversely, a rate cut stimulates credit growth and economic activity. The current neutral stance signals that the MPC is neither committed to tightening nor easing, preserving flexibility to move in either direction as data evolves.
The repo rate is the cornerstone of India's monetary policy transmission. As defined in the RBI Act, it is the rate at which the central bank provides short-term liquidity to commercial banks through repurchase agreements — the bank sells a government security to the RBI with an agreement to buy it back at a specified price and date. The interest implied in this transaction is the repo rate. The reverse repo rate (the rate at which the RBI absorbs excess liquidity from banks) and the Marginal Standing Facility (MSF) rate form the corridor around the repo rate, defining the upper and lower bounds of the overnight money market rate.
India's CPI basket is structurally skewed toward food and beverages, which carry a weight of approximately 46%. This means that supply-side shocks — poor monsoons, global commodity price spikes, or fuel price volatility — can push headline inflation above target even when underlying demand conditions are benign. This is why economists distinguish between headline CPI (the full basket) and core CPI (CPI excluding food and fuel), which better captures demand-driven, monetary-policy-sensitive inflation. …
If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do?
1.Cut and optimize the Statutory Liquidity Ratio
2.Increase the Marginal Standing Facility Rate
3.Cut the Bank Rate and Repo Rate
Select the correct answer using the code given below:
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.
Which one of the following is not the most likely measure the Government/Reserve Bank of India takes to stop the slide of Indian rupee?
Consider the following statements about India's Flexible Inflation Targeting (FIT) framework:
1.It was established by an amendment to the Reserve Bank of India Act, 1934 in 2016.
2.The inflation target is set by the RBI independently without government consultation.
3.If inflation remains outside the tolerance band for three consecutive quarters, the RBI must submit a report to the government.
4.The tolerance band around the 4% target is ±3 percentage points.
Which of the statements given above are correct?
With reference to the Monetary Policy Committee (MPC) of the Reserve Bank of India, consider the following statements:
1.The MPC consists of six members, of whom three are appointed by the central government.
2.The RBI Governor chairs the MPC and holds a casting vote in case of a tie.
3.The MPC is required to meet at least six times a year.
4.The primary instrument used by the MPC to achieve the inflation target is the policy repo rate.
Which of the statements given above are correct?
Which of the following best explains why the RBI's Monetary Policy Committee may choose NOT to raise the repo rate even when headline CPI inflation exceeds the 4% target?
Assertion (A): A 'neutral' monetary policy stance by the MPC signals that the next move in the repo rate could be either a hike or a cut, depending on incoming data.
Reason (R): Under an accommodative stance, the MPC is committed to cutting rates at every subsequent meeting until growth recovers.
Which of the following is correct?
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