What is RBI Monetary Policy? Repo Rate, Types, and Key Tools
Every time the RBI announces its monetary policy, markets react within minutes and loans, EMIs, and fixed deposit rates quietly adjust soon after. The RBI monetary policy, especially changes in the repo rate, directly affects how expensive money becomes for borrowers and how rewarding savings feel for investors.
Let us understand what the RBI monetary policy is and why repo rate changes are important!
What is Monetary Policy?
Monetary policy is the approach used by a central bank to regulate money supply and credit conditions in the economy.
Its main objectives are to control various types of inflation, maintain price stability, support employment, and ensure sustainable economic growth by influencing interest rates, bank lending, and overall economic activity through tools such as policy rates, reserve requirements, and open market operations.
What is RBI Monetary Policy?
RBI’s monetary policy is the approach used by India’s central bank to manage money supply, interest rates, and credit in the economy.
It is handled by the Monetary Policy Committee and aims to keep inflation within the 2 to 6 percent range while supporting economic growth. This is done by using monetary policy tools such as the repo rate, reverse repo, CRR, SLR, and open market operations to influence borrowing costs and liquidity.
RBI Repo Rate Meaning
The RBI repo rate is the interest rate at which the Reserve Bank of India lends money to commercial banks for short-term requirements, usually against government securities.
It is a key monetary policy tool used to manage money supply, control inflation, and influence overall lending costs in the economy.
- When the RBI increases the repo rate, borrowing becomes more expensive, which tends to slow down spending and credit growth.
- When the repo rate is reduced, loans become cheaper, encouraging borrowing and helping stimulate economic activity.
RBI Monetary Policy Repo Rate Update (December 2025)
On 5 December 2025, the Reserve Bank of India took a decisive step to support economic growth by reducing the repo rate by 25 basis points, bringing it down to 5.25 per cent.
What are the types of monetary policy?
The two main types of monetary policy are expansionary and contractionary, depending on whether the economy needs support or restraint.
1. Expansionary monetary policy
The goal is to stimulate economic growth and increase demand during periods of slowdown or recession. It works by increasing the money supply and making borrowing cheaper.
- Central banks do this by lowering interest rates, such as the repo or discount rate.
- It reduces bank reserve requirements like the CRR.
- It also buys government securities through open market operations to inject liquidity into the system.
2. Contractionary monetary policy
The objective is to control inflation and reduce excessive demand when the economy is overheating.
It works by decreasing the money supply and making borrowing more expensive.
- This is achieved by raising interest rates.
- Increasing reserve requirements for banks
- Selling government securities in the market to absorb excess liquidity.
Other classifications of monetary policy
- Conventional policy relies on standard tools such as interest rates and open market operations, including repo, reverse repo, CRR, and SLR.
- Unconventional policy is used during financial stress or crises and includes measures like quantitative easing or negative interest rates.
- Exchange rate policy focuses on managing the currency through fixed, floating, or managed float systems.
In simple terms, central banks use expansionary policy to support a weak economy and contractionary policy to cool down inflation by adjusting the cost and availability of money.
What are the tools of monetary policy?
Central banks control money supply and credit in the economy using a mix of traditional and modern policy tools to influence interest rates, inflation, and overall economic activity.
- Traditional tools (quantitative)
- Open Market Operations (OMO): Buying government securities injects money into the system and lowers interest rates, while selling securities absorbs liquidity and pushes rates higher.
- Discount rate or policy rate: This is the rate at which commercial banks borrow from the central bank. Lower rates encourage lending and spending, while higher rates discourage borrowing.
- Reserve requirements: This refers to the portion of deposits banks must keep as reserves, which directly affects how much they can lend.
- Modern and other tools
- Interest on excess reserves (IOER): Central banks pay interest on reserves held above the required minimum, influencing whether banks lend or hold funds.
- Forward guidance: Clear communication about future policy intentions helps shape market expectations and stabilise economic decisions.
- Quantitative easing (QE): Large-scale asset purchases, especially during crises, are used to lower long-term interest rates and support liquidity.
- Moral suasion: The central bank informally persuades banks to expand or restrict credit.
- Selective credit controls: Credit is directed towards priority sectors such as agriculture or small businesses.
Monetary Policy vs Fiscal Policy
Monetary policy and fiscal policy are the two main tools used to manage the economy, but they differ in control and approach.
| Feature | Monetary Policy | Fiscal Policy |
| Primary Authority | Central banks, such as the Reserve Bank of India or the Federal Reserve | National Government, such as the Ministry of Finance or Parliament |
| Key Tools | Interest rates, money supply, and reserve requirements | Taxation and government spending |
| Primary Goal | Price stability, inflation control, and liquidity management | Economic growth, development, and job creation |
| Speed of Action | High can be adjusted relatively quickly | Low, as it requires budget approval and legislation |
| Political Influence | Low, largely independent of political pressure | High, influenced by political priorities and policy agendas |
| Update Frequency | Ongoing, based on economic conditions | Usually, it is annually through the government budget |
| Targeted Impact | Broad, affects the overall economy | Specific, it can target selected sectors or population groups |
How RBI Monetary Policy Impacts Your Loans and Investments
RBI monetary policy directly affects your loans, investments, and overall financial planning.
- When the RBI cuts interest rates, loans such as home, personal, and business loans become cheaper, reducing EMIs and encouraging borrowing.
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- Lower rates also influence fixed deposits and savings accounts by bringing down returns.
- For investors, rate cuts often support equity markets, while bond prices usually rise as yields fall.
- When the RBI raises rates, borrowing becomes costlier, but savings instruments and fixed-income investments become more attractive.
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Conclusion
RBI monetary policy plays a central role in shaping borrowing costs, inflation levels, and economic growth in India. Recent policy actions reflect a cautious yet growth-friendly approach, supported by easing inflation and steady domestic demand.
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RBI Monetary Policy – FAQs
The RBI’s monetary policy is the framework used by India’s central bank to regulate money supply and interest rates in order to control inflation while supporting economic growth.
A 25 basis points rate cut means interest rates are reduced by 0.25 percentage points.
For example, a repo rate cut from 5.50 percent to 5.25 percent is a 25 bps cut.
RBI reduced interest rates in December 2025 by cutting the repo rate by 25 bps to 5.25 per cent.
RBI formulates monetary policy, regulates banks and NBFCs, issues currency, manages foreign exchange, and oversees payment systems.
In India, monetary policy is mandated to the Reserve Bank of India under the RBI Act, 1934.
Key rate decisions are taken by the six-member Monetary Policy Committee of the RBI.
