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Informist, Thursday, May 29, 2025

 

--RBI: To review the monetary policy framework in FY26

--RBI: To revisit optimal liquidity level for effective policy transmission 

 

NEW DELHI – The Reserve Bank of India is set to review its inflation-targetting monetary policy framework in 2025-26 (Apr-Mar), it said in its annual report for FY25. The existing framework is set to lapse on Mar. 31, 2026.  

 

Under the monetary policy framework, the government has kept 4% CPI inflation as the target of the RBI's Monetary Policy Committee for Apr. 1, 2021 to Mar. 31, 2026, with the upper tolerance limit of 6% and the lower tolerance limit of 2%. The government, in consultation with the RBI, determines the inflation target in terms of the CPI, once in five years. 

 

The operating framework of monetary policy aims at aligning the operating target – the weighted average call rate – with the policy repo rate through proactive liquidity management to facilitate transmission of repo rate changes through the entire financial system. 

 

In October, then RBI governor Shaktikanta Das had said the flexible inflation targetting framework has served us well over the years, and the flexibility embedded in the same has helped to effectively address unprecedented global challenges, while supporting growth. "It (monetary policy framework) stands out for its committee approach to decision making; transparency of policy making process and communication; accountability hinging upon quantitatively defined inflation target; and operational independence," Das had said. "Over the years, the framework has matured across various interest rate cycles and monetary policy stances." 

 

As part of its agenda for FY26, the RBI said it will support the conduct and formulation of monetary policy by providing high-quality inputs on the assessment and outlook of inflation and growth, analysing and refining forecast of liquidity conditions, studying the monetary policy transmission process, and evaluating credit conditions and sectoral flows.

 

The central bank will also revisit the optimal level of system liquidity for effective monetary policy transmission in FY26. It will also conduct spatial and cross-sectional analysis of National Sample Survey Organisation's household consumption expenditure data and collection of credit deployment data from housing finance companies for improved assessment of sectoral credit by non-banking financial companies.  End

 

Reported by Pratiksha

Edited by Tanima Banerjee

 

 

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