90 Years of RBI’s First Monetary Policy (1935-2025)

The year 2025 marks the 90th anniversary of the Reserve Bank of India's (RBI) first monetary policy announcement in 1935. Following its establishment, RBI introduced key policy measures, including setting the bank rate (BR) and the cash reserve ratio (CSR), laying the foundation for India's monetary policy framework.

Understanding Monetary Policy

Monetary policy refers to the regulation of money supply and interest rates by a country's central bank to maintain economic stability. In India, RBI formulates and implements monetary policy with the following objectives:

1. Ensuring price stability
2. Promoting economic growth
3. Maintaining financial stability

Must Read: First Repo Rate Cut In 5 Years

Instruments of Monetary Policy

Monetary policy tools are categorized into two types:

1. Quantitative Tools (Affect overall money supply)

1. Repo Rate: The rate at which RBI lends to commercial banks.
2. Reverse Repo Rate: The rate at which RBI borrows from commercial banks.
3. Statutory Liquidity Ratio (SLR): The minimum percentage of a bank’s net demand and time liabilities that must be maintained in liquid assets.
4. Marginal Standing Facility (MSF): A window for banks to borrow overnight funds from RBI against approved government securities.

2. Qualitative Tools (Regulate credit flow in specific sectors)

1. Moral Suasion: Persuading banks to follow specific credit policies.
2. Direct Action: Regulatory actions taken against banks for non-compliance.

Types of Monetary Policy
 

1. Contractionary Monetary Policy: Aims to control inflation by increasing interest rates and reducing the money supply, thereby restricting borrowing and spending.
2. Expansionary Monetary Policy: Reduces interest rates and increases liquidity in the economy, encouraging borrowing and investment.
    

India’s Current Monetary Policy Framework

 

Prior to 2016, the RBI Governor had sole authority over monetary policy decisions. However, the Finance Act, 2016 amended the RBI Act, 1934, introducing a structured decision-making process through the Monetary Policy Committee (MPC).
 

Monetary Policy Committee (MPC) The MPC plays a crucial role in India's monetary policy formulation under the Flexible Inflation Targeting (FIT) framework. Key Features of MPC: Composition: Six members—three from RBI and three appointed by the central government. Chairperson: The RBI Governor serves as the ex officio Chairperson. Voting Mechanism: Each member has one vote, and in case of a tie, the RBI Governor holds the casting vote.