"RBI Hikes Repo Rate, Shifts Stance to Calibrated Tightening"
GS Paper 3: Indian Economy, Monetary Policy, Inflation Targeting, and RBI's Role.
Prelims:
Mains:
Repo Rate
the rate at which the RBI lends short-term funds to banks against government securities.
Monetary Policy Committee (MPC)
six-member body that decides India's policy repo rate to meet the inflation target.
India's monetary policy follows a formal inflation-targeting framework established by amending the Reserve Bank of India Act, 1934 in 2016. Under Section 45ZA of the Act, the central government fixes an inflation target once every five years in consultation with the RBI. The target is notified in the Official Gazette. The current goal is to keep CPI inflation at 4%, within a tolerance band of plus or minus 2 percentage points. CPI inflation tracks retail prices using the Consumer Price Index. If inflation stays outside this band for three consecutive quarters, the RBI must explain the failure and its remedial path to the government in writing. This accountability mechanism keeps the framework answerable even though the MPC is a specialist body.
The repo rate is the rate at which the RBI lends short-term funds to banks against government securities. It is the RBI's primary tool to manage both growth and inflation. Two related rates work alongside it. The Standing Deposit Facility (SDF) rate is the rate at which banks park surplus funds with the RBI without collateral. The Marginal Standing Facility (MSF) rate is an emergency overnight borrowing window for banks, priced above the repo rate. Raising all three rates together signals a tightening stance. Cutting them signals an easier, growth-supportive stance. The RBI also uses Open Market Operations (OMO), buying or selling government bonds to adjust money supply. When inflation is high, the RBI sells securities to pull money out of the system.
The Monetary Policy Committee (MPC) decides the policy repo rate. The MPC has six members. Three come from the RBI, including the Governor who chairs the committee. Three are external experts appointed by the government. Decisions are taken by majority vote. The Governor casts the deciding vote in a tie. This structure balances institutional expertise with external accountability.
Raising the repo rate makes credit costlier for banks. Banks then pass this cost on to borrowers. This cools spending and borrowing across the economy. A rise in the repo rate therefore signals a tight money policy, while a cut signals an easy one. These tools work most effectively against demand-pull inflation, which is caused by too much money chasing too few goods. …
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.
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?
In India, which one of the following is responsible for maintaining price stability by controlling inflation?
An increase in the Bank Rate generally indicates that the
With reference to India's Monetary Policy Committee (MPC), consider the following statements:
1.The MPC comprises six members, and the RBI Governor holds a casting vote in case of a tie.
2.MPC meeting minutes are published only if two-thirds of members request it.
3.If CPI inflation remains outside its target band for three consecutive quarters, the RBI must explain this to the government in writing.
Which of the statements given above is/are correct?
With reference to inflation in India, consider the following statements:
1.Demand-pull inflation arises mainly from excess money supply or fiscal stimulus raising purchasing power.
2.Supply-side inflation, such as that caused by a deficient monsoon or rising crude oil prices, can be effectively controlled through a rise in the policy repo rate.
3.The RBI's inflation-targeting mandate is based on the Consumer Price Index, not the Wholesale Price Index.
Which of the statements given above is/are correct?
With reference to the RBI's monetary policy 'stance', consider the following statements:
1.A shift in stance from 'neutral' to 'calibrated tightening' signals that future rate hikes, not cuts, are likely.
2.Changing the policy stance requires an amendment to the RBI Act, 1934.
3.A declared stance is meant to influence inflation expectations, separate from the actual rate decision.
Which of the statements given above is/are correct?
Consider the following statements regarding the Reserve Bank of India's response to high inflation:
1.The RBI is likely to sell government securities to absorb excess liquidity.
2.The RBI is likely to lower the Cash Reserve Ratio to free up more funds for lending.
3.A rise in global crude oil prices is mainly a demand-side driver of inflation.
Which of the statements given above is/are correct?
Match List-I (Monetary Policy Stance) with List-II (Its Signal) and select the correct answer using the code given below the lists:
List-I
A.Accommodative
B.Neutral
C.Calibrated tightening
List-II
1.Future rate hikes are likely, cuts are ruled out
2.Either a rate hike or a cut remains possible
3.Room to cut rates is retained, hikes are ruled out
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