In 1935, the Reserve Bank of India (RBI) was established and announced its first monetary policy by fixing bank rate and cash reserve ratio. 

About Monetary Policy

• Refers to the process through which the Central Banks manages the supply of money in the economy 
• Objective: Price stability, economic growth, financial stability, etc. 
• Instrument of Monetary Policy
  • Quantitative tools: Repo Rate, Reverse Repo Rate, Statutory Liquidity Ratio, and Marginal Standing Facility. 
  • Qualitative Tools: Moral Suasion, Direct Action, etc. 
• Types of Monetary Policy: 
  • Contractionary Monetary policy (or Tight monetary policy): It increases interest rates and limits the outstanding money supply to decrease inflation, etc. 
  • Expansionary Monetary Policy: It decreases interest rates and increases money supply which results in increase in borrowings and consumer spending.

Current Monetary Policy framework in India

• Prior to the year 2016, the Governor of RBI was singularly responsible for the formulation of monetary policy.
• The Finance Act, 2016 amended Reserve Bank of India Act, 1934 to provide for a statutory and institutionalised framework for a Monetary Policy Committee (MPC).
  • Subsequently, flexible inflation targeting (FIT) was formally adopted