Reserve Bank of India (RBI) Monetary Policy Review

A welcome step in the light of addressing the deteriorating economic conditions.

Published bi-monthly by the Reserve Bank of India (RBI). Updated to the month of March 2020. (Published on March 27, 2020).

Recent Data Trend

RBI's Monetary Policy Committee (MPC) met on March 27, 2020, ahead of its scheduled time in the first week of April 2020 and voted for an emergency rate cut of 75 bps. Consequently, taking the policy repo rate to an unprecedented low of 4.4% from earlier 5.15% and reduced the reverse repo rate by an even bigger number of 90 bps to 4.0 %. It also reduced the cash reserve ratio (CRR) by 100 bps to 3%. With this, RBI followed the footsteps of central banks across the globe to boost liquidity in a fight against the coronavirus outbreak.

The MPC also voted for maintaining its accommodative stance as long as necessary to revive growth, while ensuring that inflation stays within the target.

High retail inflation ranging from 7-7.5% in December and January prompted RBI to pause the rate cut in its last two policy meet. However, the fall in retail inflation for the first time in seven months to 6.5% in February provided some room for RBI to cut policy rates. Also, with record food grain production, collapse in crude oil prices and weaker aggregate demand in the wake of the coronavirus outbreak, RBI expects retail inflation to ease further in the coming months.

With a stimulus package (Rs. 1.7 trillion) announced by the government a day before, a big repo rate cut along with a combination of measures to boost liquidity by RBI demonstrates the policy coordination between the two, which will be key to help arrest the economic slowdown due to COVID-19 outbreak.

Latest Policy rates

CRR Rate SLR Rate Repo Rate Reverse Repo Rate
 3  18.5  4.4 4

Brief Overview

RBI's monetary policy has emerged as a critical policy tool for achieving overall macroeconomic management, price stability, and growth. The conduct of monetary policy has evolved over time on the front of the policy framework and operating procedure. Back in the 1980s, when the economy was plagued by high inflation fuelled by excessive money supply in the form of RBI credit to government, price stability became utmost important. So, RBI adopted "monetary targeting with feedback" (targeting money supply) as the monetary policy framework suggested by the Chakravarty Committee (1985).

With the development of the financial sector, liberalization of the economy (1991) and freeing up of interest rates and exchange rates, RBI shifted its focus from exclusive reliance on monetary aggregates to a broad set of indicators. Therefore, in 1998-99 RBI started pursuing the multiple indicators approach only to later face problems associated with fulfilling multiple objectives.

However, on the recommendations of the Urjit Patel Committee (2014), RBI shifted to a new monetary policy framework of "inflation targeting". Since 2014-15, RBI has kept its mandate of achieving price stability and growth via inflation targeting.

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Next Release Date: June 4, 2020