---
title: "Money, Banking & RBI Monetary Policy | Model Diplomat"
description: "Master the RBI's structure, the monetary policy framework, inflation targeting, the MPC, and the key instruments—repo, CRR, SLR and OMOs—that steer money and"
url: "https://modeldiplomat.com/learn/lessons/upsc-indian-economy-money-banking-the-rbi-monetary-policy"
---

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Money, banking & the RBI (monetary policy)

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# Money, banking & the RBI (monetary policy)

RBI structure, monetary policy framework, inflation targeting, the MPC and policy instruments (repo, CRR, SLR, OMOs)—the high-yield GS-3 core.

## The RBI: mandate and architecture

The Reserve Bank of India was established under the **Reserve Bank of India Act, 1934** and commenced operations on **1 April 1935**. Originally a privately owned shareholders' bank, it was nationalised on **1 January 1949** under the Reserve Bank (Transfer to Public Ownership) Act, 1948. Its preamble was amended in 2016 to give statutory force to its core objective. The RBI functions as the monetary authority, the issuer of currency (under the minimum reserve system since 1956, requiring gold and foreign securities of not less than Rs 200 crore), the banker to the government and to banks, the regulator of the banking and payment systems, and the manager of foreign exchange under the **Foreign Exchange Management Act (FEMA), 1999**.

## The 2016 inflation-targeting framework

The defining reform is the **flexible inflation targeting (FIT)** regime. Following the recommendations of the **Urjit Patel Committee (2014)**, the government and RBI signed a **Monetary Policy Framework Agreement on 20 February 2015**, and Parliament amended the RBI Act in 2016 to insert Section 45ZA onwards. The central government, in consultation with the RBI, notifies the inflation target every five years. The target set on **5 August 2016** and retained on **31 March 2021 (to March 2026)** is **4% CPI (Consumer Price Index, Combined) inflation, with a tolerance band of +/- 2%** (i.e., 2% to 6%).

A **failure** to maintain the target is defined as the average CPI inflation breaching the band for **three consecutive quarters**. On such failure the RBI must submit a report to the central government explaining the reasons, the remedial actions, and the estimated time to return to target. The first such failure report was submitted in **November 2022**, after inflation stayed above 6% through three quarters of 2022 amid the Ukraine-war commodity shock.

## The Monetary Policy Committee

The **Monetary Policy Committee (MPC)**, created under Section 45ZB, has **six members**: the RBI Governor (chairperson), the Deputy Governor in charge of monetary policy, one RBI officer nominated by the Central Board, and **three external members appointed by the central government** for a four-year non-renewable term. Decisions are by **majority vote**; in a tie the Governor has a **casting vote**. The MPC meets **at least four times a year** and a quorum is four members. The committee sets the **policy repo rate** to achieve the inflation target. This statutory, committee-based decision-making replaced the earlier system in which the Governor alone set rates, embedding accountability and reducing discretion.

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