Monetary Policy and Inflation — Quick Revision

A last-week sheet for monetary policy. Prelims checks who-does-what in the framework and the direction of each tool; Mains checks whether you understand its limits.

The Framework

Item	Fact
Objective	Price stability while keeping in mind the objective of growth
Committee behind it	Urjit Patel Committee (report January 2014)
Legal basis	RBI Act amended by the Finance Act, 2016 (Chapter IIIF)
Target	CPI (Combined) 4%; band 2% to 6%
Set by	Central Government in consultation with the RBI, every five years (Section 45ZA)
MPC	Section 45ZB; six members; three external
Failure	Average inflation outside the band for three consecutive quarters (Section 45ZN)

The MPC

Feature	Rule
Chair	RBI Governor
Internal members	Governor, Deputy Governor (monetary policy), one RBI officer nominated by the Central Board
External members	Three, appointed by the Central Government; four-year term; no reappointment
Meetings	At least four a year
Quorum	Four, including the Governor (or the Deputy Governor in his absence)
Tie	Governor’s casting vote
Minutes	Published on the 14th day

The Toolkit

Tool	Effect when raised / used
Repo rate ↑	Borrowing costlier; tightens
CRR ↑	Drains liquidity; multiplier falls
SLR ↑	Less bank money for lending
OMO purchase	Injects liquidity
OMO sale	Absorbs liquidity
SDF	Absorbs surplus; floor of corridor; no collateral
MSF	Emergency borrowing; ceiling of corridor; can dip into SLR
MSS	Absorbs liquidity from capital inflows (since 2004)

High-yield facts

SDF = repo − 25 bp (floor, since April 2022); MSF = repo + 25 bp (ceiling, since 2011).
Bank rate is aligned with MSF and used for penal rates (Section 49, RBI Act).
CRR (RBI Act, Section 42): held with the RBI, no interest. SLR (BR Act, Section 24): held by banks in cash, gold or approved securities; ceiling 40%.
Lending-rate regimes: BPLR (2003) → Base rate (2010) → MCLR (2016) → External benchmark (2019).
First Section 45ZN report to the Government: November 2022.

Price Indices

Index	Compiler	Base	Key point
CPI (Combined)	NSO, MoSPI	2012	Monetary policy target; includes services
CPI-IW	Labour Bureau	2016	Dearness allowance
CPI-AL / RL	Labour Bureau	Labour Bureau series	Agricultural and rural labour wages
WPI	Office of the Economic Adviser, DPIIT	2011-12	No services
GDP deflator	NSO	National accounts base	Broadest; quarterly

Base years are revised periodically; check the current series before quoting.

Inflation Vocabulary

Term	Meaning
Demand-pull	Demand outruns supply
Cost-push	Input costs rise
Disinflation	Rate of inflation falls, still positive
Deflation	Price level falls
Reflation	Policy to lift prices out of deflation
Stagflation	High inflation + stagnation + unemployment
Core inflation	Headline minus food and fuel

Traps

The Government, not the RBI, sets the target.
SDF, not reverse repo, is the floor since April 2022.
Disinflation ≠ deflation.
Unexpected inflation helps borrowers, hurts lenders and fixed-income earners.