Why In News?

The RBI's Monetary Policy Committee (MPC) keeps the repo rate unchanged at 5.25% in its August 2026 review, maintains a 'neutral' stance, and raises the FY27 GDP growth forecast to 6.7% while lowering the inflation forecast to 5%.

What is Monetary Policy?

Monetary policy refers to the process by which the central bank controls the supply and cost of money in the economy to achieve macroeconomic objectives.

The RBI conducts monetary policy under the Reserve Bank of India Act, 1934, using tools such as the repo rate, CRR, and open market operations.

Objectives of Monetary Policy

  • Price stability remains the primary objective, while the RBI also supports growth, keeping in mind the objective of price stability.

  • Monetary policy aims to balance inflation control with sustainable economic growth, not just one in isolation.

  • It seeks to maintain financial stability and ensure adequate credit flow to productive sectors.

Monetary Policy Committee (MPC)

  • The MPC is a six-member body that determines the policy repo rate, with three members from the RBI (including the Governor as Chairperson) and three external members appointed by the Government.

  • The MPC meets at least four times a year on a bi-monthly basis; the August 2026 meeting is chaired by RBI Governor Sanjay Malhotra.

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

Flexible Inflation Targeting

  • India adopted Flexible Inflation Targeting (FIT) in 2016 through an amendment to the RBI Act, 1934.

  • The inflation target is fixed at 4% CPI inflation, with a tolerance band of +/- 2% (i.e., 2% to 6%), reviewed every five years.

  • Flexibility lies in accommodating short-term growth needs while keeping inflation anchored around the medium-term target.

Outcome of the Recent MPSC Meeting

RBI keeps the repo rate unchanged at 5.25% in the August 2026 bi-monthly policy review.

The Standing Deposit Facility (SDF) rate stays at 5%, and the Marginal Standing Facility (MSF) and Bank Rate remain at 5.5%.

Inflation risks remain elevated due to the possibility of second-round effects from higher food, fuel, and input costs spreading into broader price pressures, as flagged by RBI Governor.

The six-member MPC votes unanimously to hold rates, reflecting institutional consensus on supporting growth amid external headwinds.

Global economic uncertainty, including the ongoing conflict in West Asia and volatile crude oil supply chains, shapes the RBI's cautious, growth-supportive approach.

The RBI retains its 'neutral' policy stance, signalling readiness to move in either direction depending on incoming data.

Source: INDIANEXPRESS

PRACTICE QUESTION

Q. With reference to India's Monetary Policy Committee (MPC), consider the following statements:

  1. The MPC has six members, of which three are from the RBI and three are appointed by the Government.

  2. The RBI Governor has a casting vote in case of a tie in MPC voting.

  3. The MPC is constituted under the Reserve Bank of India Act, 1934.

Which of the statements given above are correct?

(a) 1 and 2 only

(b) 2 and 3 only

(c) 1 and 3 only

(d) 1, 2 and 3

Answer: (d)

Explanation:

Statement 1 is correct: The MPC consists of six members. Three members are internal representatives from the Reserve Bank of India (RBI)—the RBI Governor, the Deputy Governor in charge of monetary policy, and an officer nominated by the RBI Central Board. The remaining three members are external experts appointed by the Central Government of India.  

Statement 2 is correct: Decisions within the committee are made by a majority vote where each member has one vote. In the event of an equality of votes (a tie), the RBI Governor holds a second or casting vote to break the deadlock.  

Statement 3 is correct: The MPC is a statutory framework explicitly constituted under Section 45ZB of the Reserve Bank of India (RBI) Act, 1934, which was amended by the Finance Act of 2016 to provide it with a formal legislative backing.