Context
- RBI Governor Sanjay Malhotra stated that inflation control remains the Reserve Bank of India’s foremost priority, while assuring that India’s external sector remains resilient despite global geopolitical tensions and currency volatility. He also highlighted the strong response to RBI’s recent measures aimed at attracting foreign capital.
About RBI
- Established on 1 April 1935 under the Reserve Bank of India Act, 1934.
- Nationalised: 1 January 1949.
- Headquarters: Mumbai.
- Acts as India’s Central Bank.
- Current Governor: Sanjay Malhotra.
Inflation Targeting in India
- Flexible Inflation Targeting (FIT)
- Introduced through the Monetary Policy Framework Agreement (2015).
- Given statutory status by the Finance Act, 2016.
- Inflation Target
- Target: 4% CPI inflation
- Tolerance Band: 2%–6%
- Inflation Measure
- RBI targets Consumer Price Index (CPI-Combined) inflation.
How Does RBI Control Inflation?
The Reserve Bank of India (RBI) controls inflation by reducing excess money supply and moderating demand in the economy through monetary policy.
Monetary Policy Committee (MPC)
| Feature | Details |
| Established | 2016 |
| Members | 6 |
| RBI Members | 3 |
| Government Nominees | 3 |
| Chairperson | RBI Governor |
| Decision | Majority vote |
| Governor’s Vote | Casting vote in case of tie |
| Meetings | Minimum 4 per year |
Foreign Capital Reserve Of RBI
RBI’s recent initiatives attracted:
- Nearly US$32 billion through FCNR(B) and Foreign Currency Non-Resident (Bank) deposits.
- Over US$7 billion through Government securities.
RBI’s Stand on Rupee
- RBI does not target any fixed exchange rate.
- Intervenes only to reduce excessive volatility.
- Recent depreciation is attributed mainly to:
- Geopolitical tensions
- Strengthening US Dollar
- Volatility across emerging markets
External Sector
- Strong foreign exchange reserves provide a buffer against global uncertainty.
- Capital inflows strengthen the Balance of Payments (BoP) and external stability.
| Important CTC from this article for UPSC: Reserve Bank of India (RBI)External Commercial Borrowings (ECB) |
Q. With reference to the Reserve Bank of India (RBI) and India's monetary policy framework, consider the following statements:
1. The Reserve Bank of India targets Consumer Price Index (CPI)-based inflation under the Flexible Inflation Targeting framework.
2. The RBI maintains a fixed exchange rate for the Indian Rupee against the US Dollar.
3. The Monetary Policy Committee (MPC) consists of six members, with the RBI Governor acting as its Chairperson.
Which of the statements given above is/are correct?
A. 1 and 2 only
B. 2 and 3 only
C. 1 and 3 only
D. 1, 2 and 3
Answer: C. 1 and 3 only
Statement 1 is Correct: RBI follows the Flexible Inflation Targeting (FIT) framework and targets 4% CPI inflation (tolerance band: 2%–6%).
Statement 2 is Incorrect: India follows a managed floating exchange rate. RBI intervenes only to reduce excessive volatility, not to maintain a fixed exchange rate.
Statement 3 is Correct: The MPC has 6 members (3 RBI + 3 Government nominees), and the RBI Governor is its Chairperson.