"RBI Weighs First Rate Hike in Years as Inflation Rises"
Monetary Policy Committee (MPC)
six-member statutory body that sets India's policy repo rate
Repo Rate
rate at which the RBI lends short-term funds to banks against government securities
India's monetary policy works under a formal inflation-targeting framework created by amending the Reserve Bank of India Act, 1934 in 2016. The Monetary Policy Committee (MPC) is the statutory body that sets the policy repo rate. It has six members: three from the RBI, including the Governor who chairs it and holds the casting vote, and three external members appointed by the government. The MPC's mandate is to keep CPI inflation at 4%, inside a band of plus or minus 2 percentage points. If inflation stays outside this band for three consecutive quarters, the RBI must explain the failure and its remedial plan to the government in writing.
A repo rate hike works through simple money-market logic. Raising the rate makes credit costlier. This can reduce money demand, cool consumption and investment, and slow price rises. A cut works in reverse. But domestic rates do not move in isolation. Bond yields in India are shaped jointly by the US Federal Reserve's own policy actions, by the RBI's repo decisions, and by domestic inflation and short-term rate expectations. When the Fed raises its rate, as it recently did to 3.75-4%, US yields rise. This widens the gap with Indian yields. A narrower interest-rate differential makes Indian debt less attractive relative to US assets, risking capital outflows. The RBI must then weigh raising its own rate partly to protect this differential, not purely to manage domestic demand.
India's rate cycle has largely stayed accommodative since the last hike in early 2023. The current review is being watched closely because it could mark the start of a reversal in that stance.
Inflation can arise from two different sources, and the distinction matters for policy choice. Demand-pull inflation comes from rising purchasing power, fiscal stimulus, or tax cuts that push up spending faster than supply can match. Cost-push or supply-side inflation comes from shocks like poor monsoons, drought, or rising global crude prices that raise production costs directly. A repo rate hike is a demand-management tool. It works well against the first kind of inflation but is a blunt instrument against the second, since it cannot grow more food or lower global oil prices.
A rate change passes through to the public via two main channels. …
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.
In India, which one of the following is responsible for maintaining price stability by controlling inflation?
What are the causes of persistent high food inflation in India? Comment on the effectiveness of the monetary policy of the RBI to control this type of inflation.
Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments.
Consider the following statements regarding the Monetary Policy Committee (MPC) of the Reserve Bank of India: 1. The MPC comprises six members, three from the RBI (including the Governor as Chairperson) and three external members nominated by the Union Government. 2. The MPC's statutory mandate is to maintain CPI inflation at 4%, within a band of plus or minus 2 percentage points. 3. If inflation remains outside this band for three consecutive quarters, the RBI must explain the failure to Parliament. How many of the above statements are correct?
With reference to the effects of US Federal Reserve policy rate hikes on the Indian economy, consider the following statements: 1. A narrowing interest rate differential between India and the US can trigger capital outflows from Indian debt markets. 2. Rising US bond yields tend to push up the cost of external borrowings for Indian entities. 3. The US Federal Reserve's rate decisions directly determine the RBI's own policy repo rate. Which of the statements given above is/are correct?
Match List I (Monetary Policy Instrument) with List II (Description) and select the correct answer using the code given below: List I:
A.Repo Rate
B.Reverse Repo Rate
C.Marginal Standing Facility (MSF) Rate
D.Bank Rate. List II:
1.Rate at which RBI lends short-term funds to banks against government securities
2.Rate RBI pays banks for parking surplus funds with it
3.Emergency overnight borrowing window priced above the repo rate
4.Rate at which RBI extends long-term loans to banks without collateral
With reference to price indices in India, consider the following statements: 1. The Wholesale Price Index (WPI) does not capture the prices of services, while the Consumer Price Index (CPI) does. 2. The CPI (Combined) is the index used by the RBI for its inflation-targeting mandate. 3. The WPI is compiled by the National Statistical Office, while the CPI is compiled by the Ministry of Commerce and Industry. How many of the above statements are correct?
With reference to transmission of a repo rate change to retail borrowers in India, consider the following statements: 1. Interest rates on loans linked to external benchmarks, such as the repo rate, typically adjust to a policy rate change almost immediately. 2. Interest rates on loans linked to the Marginal Cost of Funds based Lending Rate (MCLR) change automatically and instantly with every repo rate revision. Which of the statements given above is/are correct?
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