RBI Monetary Policy: Meaning, Need, Tools, Monetary Policy Committee, Members & Functions

RBI Monetary Policy refers to the framework used by the Reserve Bank of India (RBI) to control inflation, manage liquidity, and support economic growth. It is primarily implemented through the decisions of the Monetary Policy Committee (MPC), a statutory body formed under the RBI Act, 1934. The MPC comprises six members—three from the RBI, including the Governor as the ex-officio Chairperson, and three appointed by the Central Government. The most important tool of the RBI Monetary Policy is the repo rate, which influences borrowing costs in the economy. The committee meets at least four times a year to review macroeconomic conditions and adjust policy rates to maintain the government’s inflation target of 4% ± 2%.

The RBI Monetary Policy is one of the most important topics for UPSC IAS Examination with regards to General Studies Paper 3. 

In this article on the Monetary Policy, we shall discuss its overview, tools, and aims/functions in detail. This will be very useful for aspirants in the UPSC Prelims Exam.

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RBI Monetary Policy Meaning

The Reserve Bank of India (RBI) Monetary Policy is the set of actions and communications by the RBI to manage the supply of money and credit in the Indian economy. Its primary goal is to achieve specific macroeconomic objectives, with a core focus on maintaining price stability and promoting sustainable economic growth.

Latest Updates on the RBI Monetary Policy 2025 (August)

The Reserve Bank of India's Monetary Policy Committee (MPC), which met from August 4th to 6th, has decided to keep the key policy rates unchanged. This decision follows three consecutive rate cuts earlier in 2025 and is in line with the central bank's "neutral" stance, reflecting a cautious approach amidst a mix of domestic resilience and global uncertainties.

Key Decisions and Highlights

• Repo Rate Unchanged: The MPC voted unanimously to keep the policy repo rate unchanged at 5.5%. This means the key short-term lending rate for commercial banks remains the same.
• Neutral Stance Maintained: The policy stance was retained as "neutral," indicating the RBI will monitor economic data and remains prepared to either cut or raise rates in the future.
• Other Rates:
  • Standing Deposit Facility (SDF) rate remains at 5.25%.
  • Marginal Standing Facility (MSF) and Bank Rate remain at 5.75%.

Economic and Inflation Outlook

• GDP Growth Projection: The RBI has retained its projection for India's real GDP growth for the financial year 2025-26 at 6.5%. This is based on factors such as strong rural demand, steady consumer spending, rising government investment, and a favorable monsoon season.
• Inflation Forecast Revised Downwards: The forecast for Consumer Price Index (CPI) inflation for FY2025-26 has been revised downwards to 3.1% from the previous estimate of 3.7%. This is primarily attributed to a significant drop in food prices, which led to retail inflation reaching a six-year low of 2.1% in June 2025.
• Future Inflation Risks: While inflation is currently benign, the RBI has cautioned that it could rise again in late FY26 due to base effects and rising demand.

The decision to pause the rate-cutting cycle is aimed at allowing the full impact of the previous 100 basis points of rate cuts since February 2025 to transmit through the economy. The RBI is also closely watching external factors, such as new trade tariffs and global economic volatility, which pose risks to the economic outlook.

The next MPC meeting is scheduled for September 29 to October 1, 2025.

Download the Key Highlights of the RBI MPC Meeting August 2025 in Detail!

Need for Monetary Policy in India

The Monetary Policy Committee is needed for the following reasons:

• Monetary policy refers to the central bank's approach to using monetary tools within its competence to achieve the Act's objectives.
• Regarding monetary policy, the RBI's major purpose is to preserve price stability while seeking growth.
• Price stability is a necessary condition for long-term expansion.
• The updated RBI Act of 1934 further states that the Indian government, in collaboration with the Reserve Bank, sets the inflation objective (4 percent + 2%) every five years.

Study about the Priority Sector Lending (PSL) Scheme here.

The major instruments of monetary policy include the following:

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The Monetary Policy Committee (MPC) is a six-member body formed by the RBI to set the repo rate and manage India’s monetary policy. Its main goal is to maintain price stability while supporting economic growth. The committee includes three RBI officials and three external members appointed by the Government.

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History and Formation of RBI Monetary Policy Committee

On June 27, 2016, the Monetary Policy Committee was established. The MPC was founded under the Reserve Bank of India Act of 1934 to increase transparency and accountability in India's monetary policymaking. Prior to the creation of the committee, the Reserve Bank of India's Governor made all significant interest rate decisions on his own. 

The MPC meets at least four times a year, and following each meeting, the monetary policy is published, with each member declaring their position. The Urjit Patel Committee was the first to suggest forming a five-member Monetary Policy Committee.

Following that, the government recommended the formation of a seven-member commission.

The Monetary Policy Department (MPD) of the Reserve Bank aids the MPC in policy development. The Financial Markets Operations Department (FMOD) implements monetary policy through daily liquidity management operations.

RBI Monetary Policy Committee Members

The Monetary Policy Committee (MPC) comprises six members, including:

Learn more about Monetary Aggregates!

Selection of Members and Tenure of office in MPC

A Search-cum-Selection Committee chaired by the Cabinet Secretary, with the RBI Governor and Economic Affairs Secretary as members, as well as three experts in economics, banking, finance, or monetary policy, will choose the government's nominees to the MPC. MPC members will be appointed for a four-year term and will not be eligible for reappointment.

Monetary Policy Committee and its Functions

The Monetary Policy Committee (MPC) has several important functions:

• The MPC formulates the monetary policy of India. It sets the target for inflation and determines the appropriate policy interest rate to achieve that target.
• One of the key functions of the MPC is to target inflation and maintain price stability in the economy. It aims to keep inflation within a specified range, which is currently set at 4% with a tolerance band of +/- 2%.
• The MPC decides on the repo rate, which is the rate at which the central bank lends money to commercial banks. By adjusting the repo rate, the MPC influences borrowing costs for businesses and individuals. It thereby impacts economic activity and inflation.
• The MPC analyzes various economic and financial indicators to assess the current and future state of the economy. This includes examining factors such as GDP growth, inflation trends, employment levels, and global economic conditions.
• The MPC communicates its policy decisions and the rationale behind them to the public and financial markets. This transparency helps in maintaining credibility and managing market expectations.

Objectives of the Monetary Policy Committee of India

The RBI MPC was formed with the below mentioned objectives:

• According to the Chakravarty Committee's recommendations, price stability, economic growth, equity, social justice, and supporting the establishment of new financial enterprises are all vital aspects of India's monetary policy.
• The Reserve Bank of India (RBI) aims to keep inflation tolerable while the Indian government strives to boost the country's GDP growth rate.
• To meet the country’s inflation target and achieve its major objectives, the Monetary Policy Committee estimates the necessary policy interest rate.
• The Reserve Bank lends overnight liquidity to banks against the collateral of government and other approved assets at a repo rate under the liquidity adjustment facility (LAF).

Also, study about the Five Year Plans in India from the linked article.

The Monetary Policy Committee holds the following significance:

• Economic Stability: MPC is vital in ensuring stability by regulating key economic indicators like inflation and interest rates.
• Inflation Control: It helps control inflation, maintaining price stability crucial for sustainable economic growth.
• Interest Rate Management: MPC sets benchmark interest rates, influencing borrowing costs, spending, and investment.
• Predictable Policy Framework: Provides a transparent and predictable monetary policy framework, aiding businesses and investors in decision-making.
• Government and RBI Collaboration: Fosters collaboration between the government and the Reserve Bank of India in shaping monetary policies.
• Expertise Inclusion: Comprising experts from diverse fields, the MPC brings a comprehensive understanding of economic nuances.
• Public Accountability: Enhances accountability as MPC decisions are public, ensuring scrutiny and understanding of policy choices.

We hope that all your doubts regarding the Monetary Policy in India will be cleared after going through this article. You can download the Testbook App now to check out various other topics relevant to the UPSC IAS Exam.