Role of Central Bank in Designing and Implementing Monetary and Credit Policy & Highlights of the Latest Monetary and Credit Policy by Reserve Bank of India
The central bank of a country plays a pivotal role in the formulation and execution of its monetary and credit policy. In India, the Reserve Bank of India (RBI) is the apex monetary authority responsible for maintaining monetary stability, ensuring adequate flow of credit, and supporting overall economic growth. Through its monetary and credit policy, the RBI seeks to regulate the supply of money, interest rates, and availability of credit in the economy with the objective of controlling inflation, stabilizing the currency, promoting economic development, and ensuring financial stability.
The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. The monetary policy is instrumental in influencing the cost and availability of money and credit. In India, the monetary policy is announced bi-monthly and is managed through the Monetary Policy Committee (MPC), a statutory body set up under the RBI Act, 1934. The MPC is responsible for fixing the benchmark interest rate, i.e., the repo rate, to keep inflation within the target range while supporting growth.
Role of the Central Bank in Designing and Implementing Monetary and Credit Policy
1. Price Stability and Inflation Targeting: One of the central bank's primary roles is to ensure price stability by controlling inflation. Inflation targeting has become a central focus of modern monetary policy. In India, the RBI targets inflation within a band of 2% to 6% as agreed with the Government of India. By adjusting interest rates, especially the repo rate, the RBI controls liquidity in the economy, thereby influencing inflation.
2. Regulation of Money Supply and Credit: The central bank uses various quantitative and qualitative instruments to regulate the money supply and the availability of credit. Instruments like the Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Open Market Operations (OMO), and the Liquidity Adjustment Facility (LAF) are key tools. By modulating these parameters, the RBI influences the lending capacity of commercial banks.
3. Interest Rate Management: The central bank manages interest rates to influence the cost of borrowing and lending. By altering the repo and reverse repo rates, the RBI encourages or discourages banks to borrow funds, thereby controlling liquidity. An increase in repo rate makes borrowing expensive, thus reducing inflationary pressures, while a decrease makes borrowing cheaper, stimulating growth.
4. Credit Control and Allocation: Through selective credit controls, the RBI influences credit allocation to various sectors of the economy. It may direct credit towards priority sectors such as agriculture, small-scale industries, and exports, ensuring inclusive development.
5. Exchange Rate Management: The central bank intervenes in the foreign exchange market to curb excessive volatility in exchange rates. By buying or selling foreign currency, the RBI maintains orderly conditions in the forex market which indirectly affects monetary policy outcomes.
6. Financial Market Stability: Ensuring the smooth functioning of financial markets is an essential function. The RBI uses monetary policy to stabilize financial markets during periods of stress by injecting or absorbing liquidity.
7. Transmission of Policy Rates: The central bank also works to ensure the effective transmission of monetary policy to the broader financial system. This involves monitoring whether changes in the policy rates are reflected in bank lending and deposit rates.
8. Data Monitoring and Economic Forecasting: The RBI relies on a host of economic indicators including inflation, GDP growth, fiscal deficit, global commodity prices, and exchange rate movements to design a balanced monetary policy. It uses data analytics and forecasting tools to gauge the impact of policy measures.
9. Crisis Management and Counter-cyclical Measures: During economic downturns or financial crises, the central bank takes counter-cyclical measures such as liquidity easing, interest rate cuts, and credit facilitation schemes to restore normalcy in the financial system and support recovery.
10. Communication and Forward Guidance: Modern monetary policy involves clear communication with stakeholders and forward guidance to anchor market expectations. The RBI publishes policy statements, meeting minutes, and outlook reports to enhance transparency and predictability.
Highlights of the Latest Monetary and Credit Policy by the Reserve Bank of India (RBI)
The latest monetary policy announcement was made by the RBI’s Monetary Policy Committee (MPC) on June 7, 2025, as part of its bi-monthly review. The policy statement was framed in the context of global uncertainties, persistent inflationary pressures, and domestic macroeconomic stability. The key highlights are as follows:
1. Policy Rates Unchanged: The RBI decided to keep the repo rate unchanged at 6.50%, maintaining a status quo for the eighth consecutive time. Consequently, the reverse repo rate remained at 3.35%, the Standing Deposit Facility (SDF) rate at 6.25%, and the Marginal Standing Facility (MSF) and Bank Rate at 6.75%. The MPC adopted a “withdrawal of accommodation” stance, indicating cautious optimism towards economic recovery while being watchful of inflation.
2. Inflation Outlook and Control Measures: Headline CPI inflation had hovered around 5.4% in April and May 2025, slightly above the RBI’s comfort zone. While food inflation spiked due to erratic weather affecting supply, core inflation showed signs of moderation. The RBI projected CPI inflation for FY2025-26 at 4.8%, with Q1 at 5.1%, Q2 at 4.6%, Q3 at 4.4%, and Q4 at 4.3%. The central bank emphasized the need for vigilance in food prices and global energy prices.
3. GDP Growth Projection: The RBI projected real GDP growth for FY2025-26 at 7.2%, driven by robust investment activity, improved capacity utilization, healthy balance sheets of banks and corporates, and a pick-up in rural demand. The quarterly forecasts stood at 7.4% for Q1, 7.1% for Q2, 7.2% for Q3, and 7.0% for Q4.
4. Liquidity Management: The RBI continued to manage system liquidity actively through variable rate repo (VRR) and variable rate reverse repo (VRRR) operations. It noted that liquidity conditions were broadly balanced, with some frictional tightness at times. The RBI reiterated its commitment to ensuring adequate liquidity to support credit needs without stoking inflation.
5. Credit Growth Trends: Non-food bank credit growth remained robust at around 14.9% year-on-year, reflecting sustained demand from industry, services, and personal loans. The central bank acknowledged that while overall credit conditions were supportive of growth, careful monitoring of unsecured credit was necessary to avoid asset quality stress.
6. Sector-Specific Measures:
- Microfinance and Small Borrowers: The RBI proposed to enhance regulatory oversight of NBFC-MFIs and ensure more inclusive credit to underserved segments.
- Digital Lending: Guidelines for digital lending were reviewed to ensure consumer protection and responsible lending practices.
- Infrastructure Financing: Measures were announced to ease bank lending norms for infrastructure projects, particularly in renewable energy, smart cities, and railways.
7. Regulatory and Developmental Measures:
- Unified Payments Interface (UPI): Expansion of UPI to include credit card transactions from more banks and integration with international payment systems was proposed to boost digital adoption.
- Tokenization and Digital Currency: Progress updates were shared on the pilot of Central Bank Digital Currency (CBDC), with continued experimentation in retail use-cases and interbank settlements.
- Financial Inclusion Initiatives: The RBI announced plans to expand the Business Correspondent (BC) model in rural areas to deepen financial inclusion.
8. External Sector Management: The RBI continued its intervention in the forex market to reduce volatility amid global headwinds and capital flow fluctuations. It emphasized building forex reserves as a buffer against external shocks and noted that India’s external position remained robust with a current account deficit below 1.5% of GDP.
9. MPC’s Rationale: The MPC reiterated its focus on aligning inflation with the target while supporting growth. It emphasized data-driven policy-making and warned that premature easing of rates could fuel inflation expectations. The MPC resolved to remain watchful and ready to act if inflationary pressures re-emerged.
10. Forward Guidance: The RBI’s communication underscored a calibrated approach to policy normalization. It expressed confidence in India’s growth momentum but flagged uncertainties from global commodity prices, geopolitical tensions, and monsoon variability.
Conclusion
In conclusion, the central bank’s role in designing and implementing monetary and credit policy is critical to achieving macroeconomic stability and promoting inclusive growth. The RBI, as India’s central bank, plays a multi-faceted role involving inflation control, interest rate management, credit facilitation, exchange rate stabilization, and financial system oversight. Through its bi-monthly monetary policy statements, it provides a roadmap for stakeholders and aligns market expectations with economic realities. The latest policy reflects a cautious but confident approach amid global and domestic uncertainties, with the RBI choosing to hold rates steady while keeping an eye on inflation and liquidity conditions. The central bank’s proactive stance and well-calibrated policy tools will continue to shape India’s economic trajectory in the coming months.
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