NetMock

Fortune Favours The Bold

2️⃣ RBI Monetary Policy & Interest Rate Changes 🏦

by ·

Print Friendly, PDF & Email

2️⃣ RBI Monetary Policy & Interest Rate Changes 🏦

🔹 Introduction

The Reserve Bank of India (RBI) formulates the Monetary Policy to regulate inflation, liquidity, and economic stability in the country. The Monetary Policy Committee (MPC), headed by the RBI Governor, meets every two months to decide on interest rates and other monetary tools.

The Monetary Policy 2025 focuses on maintaining inflation within the target range (4% ± 2%), supporting economic growth, and ensuring financial stability. Recent global economic uncertainties, oil price fluctuations, and geopolitical tensions have influenced RBI’s stance.

🔹 Key Highlights of RBI’s Monetary Policy 2025

✅ Inflation Targeting & Rate Adjustments 📉

  • The repo rate remains unchanged at 6.5% to control inflation.
  • RBI’s focus is on keeping inflation within the 4% target range, with an upper limit of 6%.
  • Global economic trends, oil price fluctuations, and food supply shocks influence inflation rates.

✅ Liquidity Management Measures 💰

  • Open Market Operations (OMO) used to control liquidity in the economy.
  • Cash Reserve Ratio (CRR) remains at 4.5%, ensuring banks maintain sufficient reserves.
  • RBI’s intervention in the foreign exchange market to stabilize the rupee.

✅ Credit Growth & Economic Support 🏦

  • Targeted Long-Term Repo Operations (TLTROs) for banks to provide liquidity to specific sectors.
  • Increased lending to MSMEs, startups, and the agricultural sector.
  • Strengthening digital lending and fintech regulations to prevent fraud.

✅ Monetary Policy Tools & Their Impact ⚖️

  • Repo Rate (6.5%) – Interest rate at which RBI lends to banks.
  • Reverse Repo Rate (3.35%) – Rate at which banks park excess funds with RBI.
  • Statutory Liquidity Ratio (SLR) (18%) – Minimum reserves banks must maintain in liquid assets.
  • Bank Rate (6.75%) – Rate at which RBI lends to commercial banks in emergency situations.

✅ Impact on Key Sectors 📊

  • Housing loans & retail borrowing – EMIs remain stable due to unchanged interest rates.
  • Stock Markets & Foreign Investments – Market volatility based on global and domestic rate changes.
  • Rupee Exchange Rate – RBI’s intervention to maintain rupee stability against the dollar.

🔹 Prelims Focus Areas

  • Monetary Policy Committee (MPC) – Formation & Functions
  • Inflation Targeting Framework (Flexible Inflation Targeting – FIT)
  • Difference between Repo Rate, Reverse Repo, CRR, SLR
  • Impact of Interest Rate Changes on Economy
  • Open Market Operations (OMO) & Liquidity Management

📌 MCQs on RBI Monetary Policy 2025

1️⃣ Who is responsible for formulating India’s monetary policy?

A) Ministry of Finance
B) Reserve Bank of India (RBI)
C) Securities and Exchange Board of India (SEBI)
D) NITI Aayog

Tap here for Answer
Answer: B) Reserve Bank of India (RBI)

Explanation:

  • The Reserve Bank of India (RBI), through its Monetary Policy Committee (MPC), formulates monetary policy to regulate inflation, money supply, and economic growth.
  • The Ministry of Finance handles fiscal policy, while SEBI regulates financial markets.

2️⃣ What is the current repo rate set by the RBI as per Monetary Policy 2025?

A) 4.5%
B) 5.75%
C) 6.5%
D) 7.25%

Tap here for Answer
Answer: C) 6.5%

Explanation:

  • Repo rate is the interest rate at which RBI lends to commercial banks.
  • As per Monetary Policy 2025, the repo rate remains at 6.5% to control inflation and maintain economic stability.

3️⃣ What is the function of Open Market Operations (OMO) in monetary policy?

A) Regulating the stock market investments
B) Controlling liquidity in the economy by buying/selling government securities
C) Supervising commercial banks
D) Managing foreign direct investment inflows

Tap here for Answer
Answer: B) Controlling liquidity in the economy by buying/selling government securities

Explanation:

  • Open Market Operations (OMO) refers to the buying and selling of government securities (G-Secs) by the RBI to control liquidity.
  • If RBI sells bonds, liquidity decreases; if RBI buys bonds, liquidity increases in the banking system.

4️⃣ What is the objective of the Monetary Policy Committee (MPC)?

A) To regulate fiscal policies
B) To set inflation targets and manage monetary policy tools
C) To oversee the stock market fluctuations
D) To control government borrowings

Tap here for Answer
Answer: B) To set inflation targets and manage monetary policy tools

Explanation:

  • The Monetary Policy Committee (MPC) is responsible for setting inflation targets and interest rates.
  • It follows the Flexible Inflation Targeting (FIT) framework, where the target inflation rate is 4% (±2%).
  • The MPC consists of 6 members, including the RBI Governor as the Chairperson.

5️⃣ Which of the following monetary policy tools is used to control inflation?

A) Increasing Repo Rate
B) Reducing Statutory Liquidity Ratio (SLR)
C) Lowering the Bank Rate
D) Decreasing Cash Reserve Ratio (CRR)

Tap here for Answer
Answer: A) Increasing Repo Rate

Explanation:

  • Repo Rate is increased to control inflation by making borrowing costlier for banks, which leads to reduced money supply in the economy.
  • CRR and SLR reductions increase liquidity, which is generally used to boost economic growth, not control inflation.

🚀 Conclusion

The RBI’s Monetary Policy 2025 plays a crucial role in inflation control, economic stability, and liquidity management. With repo rate at 6.5%, the focus is on balancing inflation with economic growth. Open Market Operations, CRR, SLR, and targeted lending measures ensure financial stability.

This structured content provides UPSC Prelims-relevant material with key highlights and 5 MCQs for better understanding. 🚀 Let me know if you want the next topic in a similar format! 😊

You may also like...