Reserve Bank of India (RBI) Monetary Policy Review

RBI's monetary policy continues to be growth centric despite upside risks to inflation.

Published bi-monthly by the Reserve Bank of India (RBI). Updated up to the month of August 2021. (Published on Auguest 9, 2021).

Recent Data Trend

The Reserve Bank of India, in its monetary policy meet decided to keep the key policy rates unchanged after two emergency rate cuts amid the COVID-19 disruptions and its ensuing economic fallout. Consequently, the repo rate stands unchanged at 4% and the reverse repo rate at 3.35%. Though the economy is still far from a significant revival and needed monetary policy support, inflation took center stage. Retail inflation, measured by CPI, rose to 6.1% YoY in June from 5.9% YoY in March, breaching RBI's medium-term target of 2-6%. The Montary Policy Committee (MPC) maintained accomodative stance.

RBI noted that the economic activity had started to recover from the lows of April-May. However, the recovery momentum is petering out due to the new trend of rising COVID-19 infections.

Regarding the RBI's outlook for the economy, the MPC has assessed that the headline inflation will remain elevated in the second quarter of FY2020-21. It expects inflation to moderate in the second half of FY2020-21, though uncertainty remains. In terms of growth projections, the committee expects real GDP growth to be negative in FY2020-21. The MPC did not provide any forecasts for inflation and growth.

In our view, keeping the key policy rate unchanged seems prudent, given the uncertainty on the inflation front and the fact that the RBI has provided significant accommodation in the recent months. Two emergency rate cuts of 115 bps before have not helped considerably to encourage borrowers to borrow more. The non-food bank credit growth at 6.7% in June 2020, is still lowest in around three years. Since at this stage, the level of economic activity is largely constrained by the spread of COVID-19 infections, another rate cut wouldn't have helped in reviving economic activity substantially.

Latest Policy rates

CRR Rate SLR Rate Repo Rate Reverse Repo Rate
 3  18  4 3.35


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: October 5, 2021.