1) Policy goals (why policy is used)
Macroeconomic policy aims to achieve combinations of:
- price stability (low and stable inflation),
- economic growth,
- high employment,
- financial stability,
- external stability (BoP/exchange rate stability).
India typically balances:
- inflation control,
- growth and employment,
- stability of financial markets.
2) Monetary policy: meaning and objectives
Monetary policy is conducted mainly by RBI to influence:
- money supply and liquidity,
- interest rates,
- credit availability, with the objective of controlling inflation and supporting growth.
2.1 India’s monetary policy framework (concept)
India follows a flexible inflation targeting framework:
- Monetary Policy Committee (MPC) sets a policy rate target to achieve inflation objectives (headline CPI).
- RBI uses operational tools to align market rates with stance.
(Exact target band may be asked in some exams; if you want, tell me your exam year focus and I’ll align with current official framework.)
3) Monetary policy instruments in India (high-yield list)
3.1 Policy rates (interest rate tools)
- Repo rate: rate at which RBI lends to banks (signals tightening/easing).
- Reverse repo rate: rate at which RBI absorbs liquidity from banks.
- Standing facilities / corridor (concept): helps manage overnight rates.
3.2 Reserve requirements
- CRR: required reserves with RBI; higher CRR reduces lendable funds.
- SLR: banks’ required holding of liquid assets; affects liquidity and lending capacity.
3.3 Open Market Operations (OMO)
- RBI buys/sells government securities:
- buying injects liquidity,
- selling absorbs liquidity.
3.4 Liquidity management (broad idea)
- RBI uses instruments to keep short-term money market rates aligned with policy stance.