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UPSC Notes

Monetary Policy and Inflation Targeting

PYQs

10

Articles

5

Momentum

31

Phase IFoundation

Background

Overview

Understanding the institutional framework for monetary policy is crucial for analyzing economic stability, inflation management, and growth. Its role in India's flexible inflation targeting framework is a recurring theme in UPSC exams.

The Monetary Policy Committee (MPC) is a statutory body of the Reserve Bank of India (RBI) responsible for fixing the benchmark interest rate (repo rate) to achieve the inflation target. It was constituted under the Reserve Bank of India Act, 1934, following amendments in 2016.

Phase IIStatic core

Facts & tables

Key facts

Primary Objective

RBI's primary objective is price stability, operating under an inflation targeting framework.

Inflation Target

The target inflation rate is 4% with a +/- 2% tolerance band.

Decision-Making Body

The Monetary Policy Committee (MPC) decides policy rates to achieve the inflation target.

Key Instruments

Key instruments include the Repo Rate, Reverse Repo Rate, Cash Reserve Ratio (CRR), and Statutory Liquidity Ratio (SLR).

Composition

Six members: three from RBI (including Governor as ex-officio chairperson) and three external members appointed by the government.

Mandate

To determine the policy interest rate required to achieve the inflation target.

Decision Making

Decisions are taken by majority vote, with the RBI Governor having a casting vote in case of a tie.

Objective

To maintain price stability while keeping in mind the objective of growth.

Reference table

Static syllabus anchors

TypeReference
Conceptual areaMonetary Policy
Conceptual areaConstitutional & Statutory Bodies
Conceptual areaIndian Economy
Conceptual areaMonetary Policy Framework
Conceptual areaMacroeconomic Stability
Conceptual areaCentral Banking

Reference table

Institutions & roles

BodyRole
Reserve Bank of India (RBI)Formulates and implements
Monetary Policy Committee (MPC)Decides policy rates
Reserve Bank of IndiaHouses and supports
Phase IIIExam lens

Prelims angle

Overview

Prelims angle: Statement-based questions

Prelims angle: Factual recall

Quick revision

  • RBI's primary goal: price stability.
  • Inflation target: 4% (+/- 2%).
  • MPC sets policy rates (e.g., Repo Rate).
  • Key instruments: Repo, Reverse Repo, CRR, SLR.
  • Aims to balance inflation and growth objectives.

Elimination traps

Constitutional vs statutory — MPC is a statutory body, not constitutional.

Check if created by Constitution or by Parliament.

High-confidence PYQs

2024Statement-based questions, Conceptual understanding

Consider the following statements in respect of the digital rupee : 1. It is a sovereign currency issued by the Reserve Bank of India (RBI) in alignment wit...

EconomyOpen question
2023Multi-statement analysis, Conceptual understanding

Correct the following statements: Statement-I: In the post-pandemic recent past, many Central Banks worldwide had carried out interest rate hikes. Statement-...

EconomyOpen question
2022Multi-statement analysis, Conceptual understanding

With reference to the Indian economy, consider the following statements: 1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy gover...

EconomyOpen question

In India, which one of the following is responsible for maintaining price stability by controlling inflation?

EconomyOpen question
2022Institutional roles and functions, Factual recall

With reference to the Indian economy, consider the following statements: 1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy gover...

EconomyOpen question

In India, which one of the following is responsible for maintaining price stability by controlling inflation?

EconomyOpen question
2021Multi-statement analysis, Conceptual understanding

India Government Bond Yields are influenced by which of the following? 1. Actions of the United States Federal Reserve. 2. Actions of the Reserve Bank of Ind...

EconomyOpen question
2020Conceptual understanding, Cause and effect relationships

Consider the following statements: 1. The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI). 2. The WPI doe...

EconomyOpen question

If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do? 1. Cut and optimize the Statutory Liquidity Ratio 2. In...

EconomyOpen question
2020Multi-statement analysis, Conceptual understanding

Consider the following statements: 1. The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI). 2. The WPI doe...

EconomyOpen question

If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do? 1. Cut and optimize the Statutory Liquidity Ratio 2. In...

EconomyOpen question
2017Statement-based questions, Factual recall

Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC)? 1. It decides the RBI’s benchmark interest rates. 2. It is a...

EconomyOpen question
2016Multi-statement analysis, Purpose or function of a policy tool

What is/are the purpose/purposes of the ‘Marginal Cost of Funds based Lending Rate (MCLR)’ announced by RBI? 1. These guidelines help improve the transparen...

EconomyOpen question
2015Conceptual understanding, Multi-statement analysis

With reference to Indian economy, consider the following : 1. Bank rate 2. Open market operations 3. Public debt 4. Public revenue Which of the above is/are...

EconomyOpen question

Topic timeline

Monetary PolicyConstitutional & Statutory BodiesIndian EconomyMonetary Policy Framework
Prelims 2015· Conceptual understanding, Multi-statement analysis

With reference to Indian economy, consider the following : 1. Bank rate 2. Open market operations 3. Public debt 4. Public revenue Which of the above is/are...

Open question
Prelims 2016· Multi-statement analysis, Purpose or function of a policy tool

What is/are the purpose/purposes of the ‘Marginal Cost of Funds based Lending Rate (MCLR)’ announced by RBI? 1. These guidelines help improve the transparen...

Open question
Prelims 2017· Statement-based questions, Factual recall

Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC)? 1. It decides the RBI’s benchmark interest rates. 2. It is a...

Open question
Prelims 2020· Conceptual understanding, Cause and effect relationships

Consider the following statements: 1. The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI). 2. The WPI doe...

Open question

If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do? 1. Cut and optimize the Statutory Liquidity Ratio 2. In...

Open question
Prelims 2020· Multi-statement analysis, Conceptual understanding

Consider the following statements: 1. The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI). 2. The WPI doe...

Open question

If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do? 1. Cut and optimize the Statutory Liquidity Ratio 2. In...

Open question
Prelims 2021· Multi-statement analysis, Conceptual understanding

India Government Bond Yields are influenced by which of the following? 1. Actions of the United States Federal Reserve. 2. Actions of the Reserve Bank of Ind...

Open question
Prelims 2022· Multi-statement analysis, Conceptual understanding

With reference to the Indian economy, consider the following statements: 1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy gover...

Open question

In India, which one of the following is responsible for maintaining price stability by controlling inflation?

Open question
Prelims 2022· Institutional roles and functions, Factual recall

With reference to the Indian economy, consider the following statements: 1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy gover...

Open question

In India, which one of the following is responsible for maintaining price stability by controlling inflation?

Open question
Prelims 2023· Multi-statement analysis, Conceptual understanding

Correct the following statements: Statement-I: In the post-pandemic recent past, many Central Banks worldwide had carried out interest rate hikes. Statement-...

Open question
Prelims 2024· Statement-based questions, Conceptual understanding

Consider the following statements in respect of the digital rupee : 1. It is a sovereign currency issued by the Reserve Bank of India (RBI) in alignment wit...

Open question

Retail inflation at 16-month high of 3.9% as food items get dearer

13 Jun 2026 · RBI's monetary policy aims for price stability through inflation targeting (4% +/- 2%). The MPC sets policy rates like the Repo Rate to manage money supply and credit, influencing inflation and growth while considering economic growth.

Read article

Why RBI kept repo rate unchanged at 5.25% despite inflation concerns

05 Aug 2026 · The MPC is RBI's 6-member statutory body that sets the repo rate to manage inflation and support economic growth.

Read article

RBI needs to keep a steady hand amid uncertainty

06 Aug 2026 · The MPC is RBI's statutory body for setting the policy rate to achieve the inflation target, ensuring price stability and supporting growth.

Read article

On interest rates, Monetary Policy Committee can’t be both dovish and hawkish

22 Aug 2026 · The MPC is India's primary statutory body for setting the benchmark interest rate to achieve the inflation target, operating under the RBI and comprising six members.

Read article

First hike in over 3 years may not be last; repo rate can rise by another 75 basis points

08 Oct 2026 · India's Flexible Inflation Targeting framework mandates the RBI to keep CPI inflation within a 2-6% band, with 4% as the mid-point. The article highlights the RBI's commitment to this target, even at the cost of immediate growth, by implementing rate hikes to combat elevated inflation and recalibrate real policy rates.

Read article

Related topics

Current topic

Monetary Policy and Inflation Targeting

Often confused with

Monetary Policy and Reserve Bank of India's Role

Open notesOften confused with

Monetary Policy Tools (Repo Rate & Stance)

Open notesOften confused with

Macroeconomic Trends & Inflation

Open notesOften confused with

Monetary Policy Stance (Dovish vs. Hawkish)

Open notes

Practice writing on this topic

UPSC has asked 10 linked questions on Monetary Policy and Inflation Targeting in Mains. Write an answer to one — and get it evaluated.

See Mains PYQsEvaluate an answer

UPSC Prelims PYQs on Monetary Policy and Inflation Targeting

Practice official previous year questions asked by UPSC related to this concept.

Consider the following statements: 1. The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI). 2. The WPI doe...

2020·Economy
Solve

Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC)? 1. It decides the RBI’s benchmark interest rates. 2. It is a...

2017·Economy
Solve

If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do? 1. Cut and optimize the Statutory Liquidity Ratio 2. In...

2020·Economy
Solve

With reference to the Indian economy, consider the following statements: 1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy gover...

2022·Economy
Solve

What is/are the purpose/purposes of the ‘Marginal Cost of Funds based Lending Rate (MCLR)’ announced by RBI? 1. These guidelines help improve the transparen...

2016·Economy
Solve

Correct the following statements: Statement-I: In the post-pandemic recent past, many Central Banks worldwide had carried out interest rate hikes. Statement-...

2023·Economy
Solve

India Government Bond Yields are influenced by which of the following? 1. Actions of the United States Federal Reserve. 2. Actions of the Reserve Bank of Ind...

2021·Economy
Solve

In India, which one of the following is responsible for maintaining price stability by controlling inflation?

2022·Economy
Solve

Consider the following statements in respect of the digital rupee : 1. It is a sovereign currency issued by the Reserve Bank of India (RBI) in alignment wit...

2024·Economy
Solve

With reference to Indian economy, consider the following : 1. Bank rate 2. Open market operations 3. Public debt 4. Public revenue Which of the above is/are...

2015·Economy
Solve

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