"RBI Faces Real Interest Rate Dilemma Amid Rising Inflation"
Ex-ante real rate
nominal policy rate minus expected future inflation, not past inflation.
MPC
six-member RBI committee that sets the repo rate to meet the inflation target.
India's monetary policy operates under the flexible inflation-targeting framework created by the RBI Act, 2016. Operational responsibility rests with the Monetary Policy Committee (MPC). The MPC is a six-member body. Three members come from the RBI and three are external appointees named by the government. Its mandate is to keep CPI inflation at 4%. It allows a tolerance band of 2 percentage points on either side. Its main working tool is the repo rate, the rate at which the RBI lends short-term funds to banks.
Monetary policy tools point in different directions depending on the stance being pursued. An expansionary, growth-supportive stance involves cutting the repo rate, the Bank Rate, and the Statutory Liquidity Ratio (SLR). Raising the Marginal Standing Facility (MSF) rate is a contractionary signal instead. It tightens liquidity rather than easing it. When a currency faces depreciation pressure, the standard response is also contractionary. The RBI typically raises rates and sells dollars from reserves. It does not ease policy in this situation. Easing would widen interest-rate gaps with other economies. That would encourage capital outflows and worsen the depreciation.
This is also why bond markets react strongly to global rate moves. Yields on Indian government securities respond jointly to three factors: US Federal Reserve policy actions, the RBI's own rate decisions, and domestic inflation and short-term rate expectations. A wider India-US interest gap draws in or pushes out foreign portfolio capital. This shifts bond yields and the exchange rate together.
Monetary policy works through the real interest rate, not the nominal one. The real rate is the nominal repo rate minus expected future inflation. It is not calculated using past inflation. This distinction matters because borrowing and saving decisions are forward-looking. When expected inflation moves close to the policy rate itself, the real rate collapses towards zero. This happens even though the nominal rate has not moved. Monetary conditions then turn effectively neutral, or even loose.
This distinction matters more for demand-driven inflation than for supply-driven inflation. Raising rates cools an overheating economy by making credit costlier. It does little to offset an oil-price or food-supply shock in the short run. …
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:
With reference to the Indian economy, consider the following statements:
1.If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.
2.If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
3.If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars.
Which of the statements given above are correct?
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?
In India, which one of the following is responsible for maintaining price stability by controlling inflation?
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 of the following actions would NOT be consistent with an expansionary monetary policy stance by the RBI? 1. Cutting the repo rate 2. Raising the Marginal Standing Facility (MSF) rate 3. Cutting the Statutory Liquidity Ratio (SLR). Select the correct answer using the code given below:
Yields on Indian Government Securities (G-Secs) are influenced by which of the following? 1. Policy rate actions of the US Federal Reserve 2. RBI's own monetary policy stance 3. Domestic inflation and inflation expectations. Select the correct answer using the code given below:
With reference to the Monetary Policy Committee (MPC), consider the following statements: 1. It has six members, three from the RBI and three external members appointed by the Government of India. 2. It targets Consumer Price Index (CPI) inflation at 4%, with a tolerance band of ±2 percentage points. 3. In the event of a tie, the RBI Governor holds an additional casting vote. Which of the statements given above are correct?
The 'ex-ante real policy rate' in monetary economics is best defined as:
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