Topic 28: RBI, Monetary Policy, Banking Reforms

Q: What is the Monetary Policy Committee (MPC)? State its composition and inflation target.

The **Monetary Policy Committee (MPC)** was constituted under the RBI Act 1934 (amended 2016) to set the repo rate by majority vote. Composition: **6 members** — 3 from RBI (Governor as Chair, Deputy Governor, Executive Director) + 3 external members appointed by government for 4-year terms. Meets 6 times/year. Mandate: maintain **CPI inflation at 4% ± 2%** (2–6% tolerance band). If CPI exceeds 6% for 3 consecutive quarters, RBI must report to government.

Study Material

Paper Paper I

Unit 2

1. RBI's Repo Rate (April 2025) - Current rate: 6.00% - Cut by 25 bps in February 2025 and again in April 2025 (from 6.50% in 2024) - Signals a shift to accommodative stance to support growth - CPI inflation moderating was the trigger for the cuts
2. Inflation Targeting Framework - In force since August 2016 under a statutory mandate - CPI inflation target: 4% ± 2% (i.e., 2%–6% tolerance band) - Target reviewed every 5 years - MPC: 3 RBI members + 3 government-nominated external members
3. Key Monetary Policy Rates (April 2025) - Repo Rate: 6.00% - Standing Deposit Facility (SDF): 5.75% - Marginal Standing Facility (MSF): 6.25% - Bank Rate: 6.25% | CRR: 4.0% | SLR: 18.0%
4. Monetary Policy Committee (MPC) - Constituted under RBI Act amendment 2016 - Six members decide repo rate by majority vote - RBI Governor holds casting vote - Meets 6 times a year (every 2 months); external members serve 4-year terms
5. RBI's Functions - (a) Monetary Authority — formulates monetary policy - (b) Regulator/Supervisor of banks and NBFCs - (c) Government's Banker and Debt Manager - (d) Custodian of Foreign Exchange Reserves - (e) Issuer of Currency (note-issuing authority) - (f) Developmental Role — financial inclusion, priority sector lending
6. India's Foreign Exchange Reserves - Stood at $688 billion (January 2025) — sufficient for 11 months of imports - Composition: Forex assets ($600B), Gold ($68B), SDRs ($18B), IMF Reserve Position - India's forex reserves peaked at $642 billion in 2021
7. NPA Crisis and Resolution - Gross NPA ratio peaked at 11.5% (March 2018) - Fell to 2.67% (September 2024) — the lowest in over a decade - Decline driven by SARFAESI Act, DRT system, IBC 2016, and bank recapitalisation
8. Insolvency and Bankruptcy Code (IBC) 2016 - India's landmark financial reform for corporate insolvency resolution - Time-bound process: 180 days (extendable to 270 days) - Replaced 12 overlapping laws - NCLT (adjudicating authority) and NCLAT (appellate tribunal) established
9. Priority Sector Lending (PSL) - Banks must lend 40% of ANBC (Adjusted Net Bank Credit) to priority sectors - Agriculture: 18% | Micro Enterprises: 7.5% | Weaker Sections: 12% - Also covers: Export Credit, Education, Housing, Renewable Energy, Social Infrastructure
10. Banking Sector Consolidation - From 27 public sector banks (2017) to 12 PSBs after mega-mergers - OBC + United Bank → Punjab National Bank (2020) - Vijaya + Dena → Bank of Baroda (2019) - Andhra + Corporation + Union Bank → Union Bank of India (2020) - Syndicate Bank → Canara Bank (2020)
11. Payment System Innovations - UPI processed 17.4 billion transactions (₹23.25 lakh crore) in March 2025 - NPCI runs UPI, IMPS, NACH, FASTag, and RuPay - RBI launched Digital Rupee (e-Rs) pilot in November 2022 — CBDC (Central Bank Digital Currency)
12. Financial Inclusion — Jan Dhan Yojana - PM Jan Dhan Yojana (PMJDY) launched 28 August 2014 - Over 54 crore basic savings bank accounts opened by 2025 - Total deposits: ₹2.31 lakh crore - Features: zero-balance, RuPay debit card, ₹2 lakh accident insurance, overdraft facility

Key facts

RBI's Repo Rate (April 2025) — Current rate: 6.00% — Cut by 25 bps in February 2025 and again in April 2025 (from 6.50% in 2024)
Inflation Targeting Framework — In force since August 2016 under a statutory mandate — CPI inflation target: 4% ± 2% (i.e., 2%–6% tolerance band)
Key Monetary Policy Rates (April 2025) — Repo Rate: 6.00% — Standing Deposit Facility (SDF): 5.75% — Marginal Standing Facility (MSF): 6.25%
Monetary Policy Committee (MPC) — Constituted under RBI Act amendment 2016 — Six members decide repo rate by majority vote
India's Foreign Exchange Reserves — Stood at $688 billion (January 2025) — sufficient for 11 months of imports

Key Points at a Glance

1
RBI's Repo Rate (April 2025)
- Current rate: 6.00%
- Cut by 25 bps in February 2025 and again in April 2025 (from 6.50% in 2024)
- Signals a shift to accommodative stance to support growth
- CPI inflation moderating was the trigger for the cuts
2
Inflation Targeting Framework
- In force since August 2016 under a statutory mandate
- CPI inflation target: 4% ± 2% (i.e., 2%–6% tolerance band)
- Target reviewed every 5 years
- MPC: 3 RBI members + 3 government-nominated external members
3
Key Monetary Policy Rates (April 2025)
- Repo Rate: 6.00%
- Standing Deposit Facility (SDF): 5.75%
- Marginal Standing Facility (MSF): 6.25%
- Bank Rate: 6.25% | CRR: 4.0% | SLR: 18.0%
4
Monetary Policy Committee (MPC)
- Constituted under RBI Act amendment 2016
- Six members decide repo rate by majority vote
- RBI Governor holds casting vote
- Meets 6 times a year (every 2 months); external members serve 4-year terms
5
RBI's Functions
- (a) Monetary Authority — formulates monetary policy
- (b) Regulator/Supervisor of banks and NBFCs
- (c) Government's Banker and Debt Manager
- (d) Custodian of Foreign Exchange Reserves
- (e) Issuer of Currency (note-issuing authority)
- (f) Developmental Role — financial inclusion, priority sector lending
6
India's Foreign Exchange Reserves
- Stood at $688 billion (January 2025) — sufficient for 11 months of imports
- Composition: Forex assets ($600B), Gold ($68B), SDRs ($18B), IMF Reserve Position
- India's forex reserves peaked at $642 billion in 2021
7
NPA Crisis and Resolution
- Gross NPA ratio peaked at 11.5% (March 2018)
- Fell to 2.67% (September 2024) — the lowest in over a decade
- Decline driven by SARFAESI Act, DRT system, IBC 2016, and bank recapitalisation
8
Insolvency and Bankruptcy Code (IBC) 2016
- India's landmark financial reform for corporate insolvency resolution
- Time-bound process: 180 days (extendable to 270 days)
- Replaced 12 overlapping laws
- NCLT (adjudicating authority) and NCLAT (appellate tribunal) established
9
Priority Sector Lending (PSL)
- Banks must lend 40% of ANBC (Adjusted Net Bank Credit) to priority sectors
- Agriculture: 18% | Micro Enterprises: 7.5% | Weaker Sections: 12%
- Also covers: Export Credit, Education, Housing, Renewable Energy, Social Infrastructure
10
Banking Sector Consolidation
- From 27 public sector banks (2017) to 12 PSBs after mega-mergers
- OBC + United Bank → Punjab National Bank (2020)
- Vijaya + Dena → Bank of Baroda (2019)
- Andhra + Corporation + Union Bank → Union Bank of India (2020)
- Syndicate Bank → Canara Bank (2020)
11
Payment System Innovations
- UPI processed 17.4 billion transactions (₹23.25 lakh crore) in March 2025
- NPCI runs UPI, IMPS, NACH, FASTag, and RuPay
- RBI launched Digital Rupee (e-Rs) pilot in November 2022 — CBDC (Central Bank Digital Currency)
12
Financial Inclusion — Jan Dhan Yojana
- PM Jan Dhan Yojana (PMJDY) launched 28 August 2014
- Over 54 crore basic savings bank accounts opened by 2025
- Total deposits: ₹2.31 lakh crore
- Features: zero-balance, RuPay debit card, ₹2 lakh accident insurance, overdraft facility

What is the RBI's place in India's monetary architecture?

The Reserve Bank of India is India's central bank and apex monetary institution, combining monetary policy, bank regulation, government banking, foreign-exchange management, currency issue and developmental functions. The Reserve Bank of India's Brief History states that the Bank commenced operations on 1 April 1935 under the Reserve Bank of India Act, 1934.

Establishment and Background

The Reserve Bank of India (RBI) was established on 1 April 1935 under the Reserve Bank of India Act 1934, based on the recommendations of the Hilton Young Commission (Royal Commission on Indian Currency and Finance, 1926). It was nationalised on 1 January 1949. Its headquarters is in Mumbai, with 4 regional offices in Delhi, Kolkata, Chennai, and Mumbai.

RBI serves as the apex monetary institution of India — combining the functions of a central bank (money supply and monetary policy), banking regulator, government's banker, foreign exchange manager, and developmental institution. This multi-functional design makes RBI's role more expansive than typical central banks in developed economies.

Legal Framework

RBI Act 1934 — primary legislation governing RBI's constitution and powers
Banking Regulation Act 1949 — gives RBI supervisory powers over banks
Payment and Settlement Systems Act 2007 — covers payment infrastructure
FEMA 1999 — replaced FERA; RBI is the enforcement authority for foreign exchange

Exam Relevance for RAS 2026

Monetary policy, especially the MPC framework and inflation targeting, appeared in 2016 and 2023. With multiple rate cuts in 2025 and ongoing digital payments transformation, the topic has fresh exam currency. Candidates must know exact policy rates, NPA resolution trajectory, and key reforms post-2016.

Sign up free to claim an intro topic

The first gated topic you open stays yours; the rest needs a Study Pack or Complete Course.

PREDICTED Predicted RAS Questions

Based on PYQ trends and 2026 syllabus analysis

1 5M What is the Monetary Policy Committee (MPC)? State its composition and inflation target. 5 marks · 50 words

Model Answer

The Monetary Policy Committee (MPC) was constituted under the RBI Act 1934 (amended 2016) to set the repo rate by majority vote. Composition: 6 members — 3 from RBI (Governor as Chair, Deputy Governor, Executive Director) + 3 external members appointed by government for 4-year terms. Meets 6 times/year. Mandate: maintain CPI inflation at 4% ± 2% (2–6% tolerance band). If CPI exceeds 6% for 3 consecutive quarters, RBI must report to government.

~50 words • 5 marks