RBI’s Monetary Policy | 23 Jun 2025

Source: TH

Why in News?

In the June 2025 Monetary Policy Committee (MPC) meeting, the Reserve Bank of India (RBI) Governor highlighted the fragility of the global economy, noting that despite 100 bps rate cuts since February 2025, monetary policy has limited space to support growth. Given the slow pace of inflation reduction and external uncertainties, a shift from an accommodative to a neutral stance was deemed appropriate.

Note: An accommodative stance means the RBI lowers or maintains low policy rates to boost growth, increase liquidity, and encourage investment during slow growth or low inflation.

• A neutral stance gives the RBI flexibility to raise or cut rates depending on evolving inflation or growth risks, aiming for a balanced policy approach.

What is the Monetary Policy Committee (MPC)?

What is Monetary Policy?

• About: Monetary policy is the process through which the RBI regulates the money supply in the economy by using various monetary instruments under its control to achieve the objectives outlined in the RBI Act, 1934.
• Objectives: The primary objective is price stability, with inflation targeting as the primary focus. The target is CPI (Combined) inflation within the 2-6% range, set by the Government in consultation with the RBI.
  • Other objectives include promoting growth, generating employment, and ensuring exchange rate stability.

Tools of Monetary Policy: 

• Quantitative Tools
  • Reserve Ratios:
    • Cash Reserve Ratio: The percentage of a bank’s Net Demand and Time Liabilities (NDTL) that must be maintained as cash reserves with the RBI.
    • Statutory Liquidity Ratio: Banks are required to hold a fixed portion of their NDTL as liquid assets such as cash, gold, and unencumbered securities.
  • Open Market Operations (OMO): Purchase and sale of government securities.
  • Repo & Reverse Repo Rate:
    • Repo Rate: It is the rate at which the RBI offers overnight liquidity to banks in exchange for government and other approved securities as collateral.
    • Reverse Repo Rate: It is the rate at which the RBI absorbs overnight liquidity from banks in exchange for eligible government securities as collateral.
  • Bank Rate: It is the rate at which the Reserve Bank is willing to purchase or rediscount bills of exchange or other commercial papers. 
    • The bank rate is the interest rate at which the RBI lends long-term, unsecured funds to commercial banks, without collateral. The repo rate is the rate at which the RBI lends short-term funds to banks against collateral to manage liquidity.
  • Marginal Standing Facility (MSF): It is the amount of overnight funds that scheduled commercial banks can borrow by utilizing their SLR portfolio up to a specified limit, at a penal interest rate.
  • Liquidity Adjustment Facility (LAF): It consists of overnight as well as term repo auctions.
  • Market Stabilisation Scheme (MSS): MSS bonds are special bonds issued by the RBI on behalf of the government to absorb excess liquidity when regular government bonds are insufficient. 
    • These bonds generally have a short tenure of less than six months, though the maturity period may vary as per requirements.
• Qualitative Tools
  • Margin Requirement: It is the difference between the market value of the assets and its maximum loan value. 
    • It helps control speculative lending and is adjusted under selective credit control.
  • Consumer Credit Control: Setting rules on down payments and maximum repayment periods for installment credit used to purchase goods.
  • Rationing: Regulation of credit by commercial banks, e.g., RBI may limit loans to sectors like real estate to check excessive lending.
  • Moral Suasion: A request by the RBI urging commercial banks to adopt specific measures in line with economic trends.
  • Direct Action: Steps taken by the RBI against banks that fail to meet specified conditions or requirements.