Indian Economy

Monetary Policy and Inflation

Monetary policy and inflation for UPSC: the MPC and inflation targeting, CRR, SLR, repo, SDF, MSF and OMOs, transmission, CPI vs WPI and types of inflation.

SyllabusGS III · Indian economy and issues relating to growth, development and mobilisation of resources; monetary policy and inflation

Every two months the RBI’s Monetary Policy Committee announces its decision on the policy repo rate, and every month the National Statistical Office releases the inflation number the decision is aimed at. This chapter connects the two: what inflation is, how India measures it, and the tools the RBI uses to keep it near target.

What UPSC asks

  • Prelims: the composition and rules of the MPC, the inflation target and its tolerance band, the difference between repo, reverse repo, SDF, MSF and bank rate, CRR vs SLR, OMOs, CPI vs WPI, and inflation vocabulary (stagflation, disinflation, core inflation).
  • Mains GS III: inflation targeting and growth, food inflation and supply shocks, transmission of policy rates, and coordination between fiscal and monetary policy.

Key sub-topics

Sub-topicWhat to master
FrameworkUrjit Patel Committee, RBI Act amendments of 2016, MPC, the 4% ± 2% target
InstrumentsQuantitative (CRR, SLR, LAF, MSF, SDF, OMO, MSS) and qualitative tools
TransmissionBase rate, MCLR, external benchmark lending rate
InflationTypes, causes, effects; headline vs core
MeasurementCPI (Combined), CPI-IW, WPI, GDP deflator

Start with Monetary Policy Framework and Inflation, then revise with the quick revision sheet and practice questions.