Inflation & Monetary Policy

Inflation & Monetary Policy

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Key Definition (1 sentence)

Inflation in India is primarily measured through CPI (Consumer Price Index, the official headline measure) and WPI (Wholesale Price Index); RBI controls it using the repo rate — the rate at which RBI lends to banks — under a formal inflation targeting framework with a 4% target (±2% band).

Why It Matters for RBI

RBI’s primary mandate is maintaining price stability — keeping inflation at 4% (±2%); if inflation runs above 6% (top of the band) for three consecutive quarters, RBI must formally report to the government explaining why and what it will do; for the exam, understanding the transmission mechanism from repo rate to your EMI is essential — every percentage point change in repo rate eventually flows through to your home loan rate.

Must Know Facts

• CPI (Combined) inflation: India’s official headline inflation — 4.9% (October 2024); RBI targets 4% with ±2% tolerance band (so 2-6% is the acceptable range)
• WPI: Measures wholesale prices — food, fuel, manufactured products; WPI inflation was (-)2.6% in October 2024 (deflation in wholesale)
• Repo Rate: 6.5% (as of December 2024, unchanged since February 2024); RBI’s main policy rate
• Reverse Repo Rate: 3.35% (= repo rate minus 3.15%, maintained at a spread of 100 bps below repo)
• MSF Rate (Marginal Standing Facility): 6.75% (= repo rate + 25 bps) — banks can borrow up to 2% of their NDTL from RBI under MSF
• Bank Rate: 6.75% — the rate at which RBI buys/discounts bills of exchange from banks (officially the same as MSF since 2016)
• CRR: Cash Reserve Ratio — 4.5% of NDTL (as of latest); banks must hold this as reserves with RBI
• SLR: Statutory Liquidity Ratio — 18% of NDTL; banks must hold this in government securities, T-bills, etc.

Quick Example / Application

When you take a home loan at 8.5% interest, here’s how RBI’s repo rate connects: RBI raises repo rate by 25 basis points (0.25%) → banks’ cost of funds rises → banks raise their Marginal Cost of Funds based Lending Rate (MCLR) by roughly the same → your home loan EMI goes up. This is monetary policy transmission. Conversely, when inflation falls and RBI cuts repo, your EMI eventually falls. In 2020, RBI cut repo from 5.15% to 4.0% in emergency COVID measures — and within 6 months, home loan rates fell to historic lows of 6.5-7%, spurring a housing boom.

1-Line Summary

RBI fights inflation with the repo rate: hike to cool demand (and risk growth), cut to boost growth (and risk inflation) — all while CPI is the official target, WPI is a leading indicator, and the 4% ±2% band defines success.

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Concept Explanation

Let me break this down practically — because the exam will test not just definitions but your ability to reason about what RBI should do in a given situation.

What is inflation, really?

Inflation is too much money chasing too few goods — or more practically, a sustained increase in the general price level over time. For you as a citizen, it means your ₹100 note buys less every year. For RBI, it means the purchasing power of the rupee is eroding — which undermines savings, investment, and economic planning.

India measures inflation primarily through two indices: CPI and WPI.

CPI (Consumer Price Index) — what you pay:

CPI measures the change in the retail price of a basket of goods and services that a typical consumer buys. This is what actually matters to households — the price of vegetables at the sabzi mandi, the cost of your child’s school fees, your electricity bill. That’s why RBI uses CPI as its official inflation target.

CPI is composed of:

• Food and Beverages (~39.5% weight)
• Housing (~10%)
• Fuel and Light (~7%)
• Clothing and Footwear (~6%)
• Transport and Communication (~8%)
• Education (~4%)
• Medical Care (~6%)
• and others

CPI inflation in India has been running above RBI’s 4% target for much of 2023-24 and 2024 — primarily driven by food prices (tomato prices, onion prices, pulses). In October 2024, CPI inflation was 4.9%, with food inflation at 6.2%.

WPI (Wholesale Price Index) — what businesses pay:

WPI measures price changes at the wholesale or factory-gate level — before goods reach the retail consumer. It covers three major groups:

• Primary Articles (~22%): food articles, non-food articles, minerals
• Fuel and Power (~13%): coal, crude oil, natural gas
• Manufactured Products (~64%): textiles, chemicals, machinery, metal products

WPI is useful as a leading indicator — if wholesale prices rise, those costs eventually pass through to retail prices. WPI was in deflation (negative) for much of 2023-24 — in October 2024, WPI inflation was -2.6%. This CPI-WPI divergence is important: WPI can be negative while CPI remains positive, because CPI includes services (rent, education, healthcare) and retail markups that WPI doesn’t capture.

RBI’s inflation targeting framework:

In 2016, India formally adopted an inflation targeting framework through a amendment to the RBI Act, 1935 (via the Finance Act, 2016). Under this framework:

• Target: 4% CPI inflation
• Band: ±2% (so the acceptable range is 2-6%)
• Horizon: The target is for CPI inflation averaged over the year
• Duty: RBI must try to achieve the target; if it misses for 3 consecutive quarters, RBI must publicly explain to the government

The Monetary Policy Committee (MPC) sets the repo rate. It has 6 members: 3 from RBI (including the Governor as Chairman) and 3 external members appointed by the government. Decisions are taken by majority vote, and the MPC meets 6 times a year (bi-monthly).

Key policy rates you must know:

The RBI’s rate corridor system works as follows:

• Repo Rate (6.5%): The rate at which banks borrow from RBI by selling government securities with an agreement to repurchase them the next day. This is the main policy rate.
• Reverse Repo Rate (3.35%): The rate at which RBI pays banks to park excess reserves. Maintained at repo rate minus 3.15 percentage points.
• MSF Rate (6.75%): The Marginal Standing Facility rate — banks can borrow up to 2% of their NDTL (Net Demand and Time Liabilities) from RBI at repo rate + 25 basis points. This is the upper bound of the corridor.
• Bank Rate (6.75%): The rate at which RBI discounts bills of exchange and advances against government securities. Officially aligned with MSF since 2016.
• CRR (4.5%): Cash Reserve Ratio — every bank must hold 4.5% of its NDTL as cash reserves with RBI (not earning interest).
• SLR (18%): Statutory Liquidity Ratio — banks must hold 18% of NDTL in government securities, T-bills, and other approved securities.

How does repo rate affect your loan EMI?

This is the transmission mechanism, and it’s critical for the exam:

RBI changes repo rate → This changes banks’ cost of borrowing from RBI → Banks adjust their MCLR (Marginal Cost of Funds based Lending Rate) → MCLR change flows through to your loan’s interest rate → Your EMI changes.

In practice, transmission is not perfect or immediate. It can take 3-6 months for a repo rate change to affect your loan rate, depending on when your bank’s MCLR resets. Some loans (like those linked to the External Benchmark Based Lending Rate, or EBR, introduced in 2019) transmit faster — within a month. Since October 2019, RBI mandated that all new floating-rate loans (home loans, MSME loans) must be linked to an external benchmark (usually RBI’s repo rate or 3-month T-bill rate), which has improved transmission significantly.

Key Terms & Definitions

Term	Definition
CPI (Consumer Price Index)	Measures retail price changes for a typical consumer basket; India’s official headline inflation measure; RBI’s target
WPI (Wholesale Price Index)	Measures wholesale/factory-gate price changes; tends to be a leading indicator of CPI; currently in deflation
Repo Rate	The rate at which RBI lends short-term (overnight) money to banks by buying government securities — RBI’s primary policy rate
Reverse Repo Rate	The rate RBI pays banks to park surplus reserves with RBI; 100 bps below repo rate; banks rarely use this in normal times
MSF (Marginal Standing Facility)	Emergency borrowing window for banks; repo rate + 25 bps; allows banks to borrow up to 2% of NDTL on a given day
Bank Rate	The official rate at which RBI discounts bills of exchange; acts as the ceiling for the interest rate corridor; aligned with MSF
CRR (Cash Reserve Ratio)	Percentage of bank deposits that banks must hold as cash with RBI; currently 4.5%; RBI rarely uses CRR changes as a tool
SLR (Statutory Liquidity Ratio)	Percentage of NDTL that banks must hold in government securities, gold, and T-bills; currently 18%
Inflation Targeting	Monetary policy framework where RBI’s primary objective is achieving a specific inflation target (4% for India); achieved through repo rate changes
MPC (Monetary Policy Committee)	Six-member committee that sets the repo rate; 3 RBI officials + 3 external members; decisions by majority vote; meets bi-monthly
Monetary Policy Transmission	The process by which changes in RBI’s policy rate affect actual lending rates, credit availability, and ultimately inflation and growth
MCLR (Marginal Cost of Funds based Lending Rate)	Banks’ internal benchmark rate; revised at least annually; your loan’s interest rate = MCLR + spread
EBR (External Benchmark Based Lending)	Loan rates linked to external rates (RBI repo, T-bill yield); improves monetary policy transmission

Real-World Example (RBI Context)

The 2022 inflation fight — when RBI was behind the curve:

In 2022, global commodity prices surged following Russia’s invasion of Ukraine. Crude oil hit $120/barrel. Global inflation reached 40-year highs. India imported inflation — fuel prices rose, food prices rose, and CPI inflation touched 7.8% in April 2022 (well above the 6% upper band).

RBI’s MPC responded aggressively — hiking the repo rate by 190 basis points (1.9 percentage points) between May 2022 and February 2023: from 4.0% to 5.9% in just 8 months. This was the fastest rate-hiking cycle in a decade. By December 2023, CPI inflation had fallen to 5.7%, and by mid-2024 it was around 4-5%.

However, this came with growth costs — GDP growth slowed from 7.2% in 2021-22 to 6.5% in 2023-24. But the inflation credibility was maintained — India avoided the hyperinflation seen in some peer economies (Pakistan, Sri Lanka, Turkey).

Exam Pattern / How It Appears

• Data-based MCQs: Current repo rate, CRR, SLR percentages; recent CPI/WPI inflation figures
• Conceptual questions: Why does RBI use CPI and not WPI for targeting? What is the transmission mechanism?
• Numerical problems: Calculating inflation from price indices, real vs nominal rate of interest
• Case-based: Given a scenario (food inflation surges, rupee falls, growth slows), what should RBI do and why?
• Policy reasoning: Repo rate hike vs CRR cut — which tool is more effective in a given situation

Step-by-Step Example

Q: The CPI for a basket was 170 in 2023 and 178.5 in 2024. Calculate the inflation rate. Answer: Inflation rate = [(178.5 - 170) / 170] × 100 = (8.5 / 170) × 100 = 5.0%

Q: RBI hikes the repo rate from 6.5% to 6.75%. If your home loan is linked to the repo rate (EBR) with a spread of 2.5% over repo, what happens to your interest rate and EMI? Answer: Your interest rate changes from (6.5% + 2.5%) = 9.0% to (6.75% + 2.5%) = 9.25% — a 25 basis point (0.25 percentage point) increase. Your EMI would increase, assuming loan tenure remains the same.

Q: Why did RBI keep repo rate at 6.5% in February 2025 despite inflation being above 4%? Answer: RBI must balance two objectives: price stability (fighting inflation) and growth support. With CPI at ~4.9% (October 2024), inflation was within the upper band (6%) — not alarming. RBI’s policy statement noted that food inflation was moderating, and growth needed support. Raising rates would have choked investment. RBI maintained status quo while signalling continued vigilance on inflation.

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Concept Deep Dive

The theoretical foundations — why central banks control inflation:

The classical economists believed money was neutral in the long run — that changes in the money supply only affected prices, not real output. But Keynes showed that in the short run, monetary expansion could stimulate output and employment. The modern synthesis — the New Keynesian framework — is what most central banks, including RBI, operate under: monetary policy affects real variables (output, unemployment) in the short run and only prices in the long run.

This creates a dilemma: fight inflation aggressively and risk a recession; ease policy to support growth and risk inflation. The Phillips Curve describes this trade-off — lower unemployment tends to come with higher inflation, and vice versa. Central banks navigate this trade-off by targeting a specific inflation rate, which allows the economy to grow at its potential without overheating.

India’s adoption of formal inflation targeting in 2016 was a recognition that price stability is a precondition for sustained growth — not an obstacle to it. High and volatile inflation erodes savings, distorts investment decisions, hurts the poor most (they can’t hedge), and ultimately reduces growth. By anchoring inflation expectations at 4%, RBI creates a stable environment for investment and planning.

CPI vs WPI — the divergence and what it means:

India has two headline inflation measures, and understanding their differences is crucial for the exam and for policy analysis.

CPI (Consumer Price Index):

• Measures the retail price of a fixed basket of goods and services purchased by a typical urban or rural consumer
• Published by the National Statistical Office (NSO), Ministry of Statistics and Programme Implementation (MOSPI)
• Base year: 2012 (currently being revised to 2024)
• Weights: Food and beverages 39.5%, Housing 10%, Fuel & Light 7%, Transport & Communication 8%, Health 6%, Clothing 6%, Education 4%
• Covers approximately 1,075 items across 8 major groups
• This is what households actually experience and what RBI targets

WPI (Wholesale Price Index):

• Measures changes in wholesale prices at the first point of bulk sale — factory gate prices, agricultural wholesale prices
• Published by the Office of the Economic Adviser, Department of Industrial Policy and Promotion (DIPP)
• Covers 697 items across Primary Articles, Fuel & Power, and Manufactured Products
• Does NOT include services (housing rent, education fees, healthcare, transport fares) — the largest and fastest-growing component of consumer spending
• WPI is primarily used by businesses and economists as a leading indicator — if WPI rises, CPI will eventually follow as producers pass on higher costs to consumers
• Since 2014, WPI has been the official basis for deflating nominal GDP to real GDP in India

The CPI-WPI divergence has been particularly stark in 2023-24: CPI ran at 4-6% (above target), while WPI was negative (deflation) for most of the year. This happened because:

1. Food prices surged (onion, tomato, pulses) — these are in CPI at retail but in WPI at wholesale
2. Services inflation remained elevated — rent, school fees, healthcare — none of which are in WPI
3. Manufacturing input costs fell globally (deflation in commodity markets), which showed up in WPI but not in CPI

The monetary policy transmission mechanism — the full chain:

RBI’s monetary policy operates through a complex transmission chain. Here’s the complete picture:

1. Policy rate signal (repo rate): When RBI changes repo rate, it changes the cost at which banks can borrow from RBI overnight. This is the signal to the banking system about the direction of monetary policy.

2. Money market rates: Change in repo rate flows through to overnight money market rates (call money, T-bill rates). Since the 2016 rate corridor framework, the overnight rate is kept within the corridor between the MSF (6.75%) and reverse repo (3.35%) — currently at approximately 6.5% (the weighted average call rate, WACR, tracks repo rate closely).

3. Bank deposit rates: Banks compete for deposits. When the repo rate rises, banks gradually raise deposit rates to attract deposits (necessary to maintain the CRR-SLR requirements and fund loans). This takes 3-6 months as deposit contracts are longer-term.

4. Bank lending rates (MCLR → EBR): Banks price their loans based on their cost of funds. The MCLR (introduced in 2016 to replace the older Base Rate) reflects the marginal cost of funds. Since October 2019, RBI mandated external benchmark linking for all floating-rate loans — this significantly improved transmission. Now, your home loan rate = repo rate (or 3-month T-bill) + spread (typically 2.5-3%).

5. Demand for credit: Higher rates reduce demand for loans — businesses postpone investment, consumers postpone big purchases (cars, homes).

6. Aggregate demand: Reduced credit demand reduces consumption and investment, cooling the economy.

7. Inflation: Lower aggregate demand eases supply-demand imbalances, reducing price pressures.

Real interest rate — why it matters:

The Fisher Equation: Real Interest Rate = Nominal Interest Rate - Expected Inflation

Example: If your home loan is at 9% nominal rate and inflation is 5%, your real interest rate is 4%. If inflation falls to 4%, your real rate rises to 5% — even though your nominal rate hasn’t changed. This is why negative real interest rates (nominal rate < inflation) are considered expansionary — borrowing is effectively free or subsidized. Post-2022 rate hiking cycle: nominal rates rose to 9-10%, but with inflation at 5-6%, real rates were only 4-5% — still historically low, which supported continued credit demand.

The rate hiking cycle of 2022-23:

India’s MPC initiated a rate hiking cycle in May 2022 that was remarkable for its speed:

• April 2022:Repo 4.0% → CPI 7.8% (April), 7.0% (May)
• May 2022: +40 bps → 4.40%
• June 2022: +50 bps → 4.90%
• August 2022: +50 bps → 5.40%
• September 2022: +50 bps → 5.90%
• December 2022: +35 bps → 6.25%
• February 2023: +25 bps → 6.50%

Total: 250 bps hike in 9 months — the fastest hiking cycle since the post-2008 recovery.

The logic: global inflation was at 40-year highs, India was importing inflation (crude oil, edible oils, fertilizers), food inflation was double-digit, and the rupee was weakening (touching ₹83/$ in 2022). RBI had to act to anchor inflation expectations and prevent a wage-price spiral.

By December 2023, CPI had fallen to 5.7%. The rate hikes had worked — but at the cost of growth moderation (GDP growth slowed from 7.2% to 6.5%).

Advanced Analysis

Monetary policy challenges in a developing economy:

RBI faces structural challenges that developed country central banks don’t:

1. Informal economy: ~80% of the workforce operates outside the formal banking system. RBI’s rate signals don’t reach them. They borrow from moneylenders at 24-60% annual rates, completely insulated from repo rate changes.

2. Food price shocks: Food has ~40% weight in CPI. A bad monsoon or pest attack on onion crops can spike CPI by 1-2 percentage points — something entirely outside RBI’s control. RBI cannot hike repo rate to grow more onions. These supply-side inflation spikes require fiscal policy responses (import duty reductions, buffer stock releases) — not monetary tightening.

3. Fiscal dominance risk: If the government runs large fiscal deficits and borrows heavily, it can crowd out private investment and create inflation. The fiscal deficit was 6.4% of GDP in 2023-24. Large government borrowing can push up G-Sec yields, which feeds into bank lending rates — undermining RBI’s monetary easing. This is called fiscal dominance and limits RBI’s independence.

4. Exchange rate pass-through: India imports crude oil, gold, and electronics. When the rupee depreciates (it fell from ₹73/$ in 2021 to ₹83/$ in 2022), import prices rise and feed into CPI. RBI must sometimes choose between defending the rupee (raising rates, attracting foreign capital) and supporting growth (lowering rates). This is the impossible trinity: you can’t have free capital flows, a fixed exchange rate, and independent monetary policy simultaneously.

5. Banking sector weaknesses: High NPAs in public sector banks can clog the transmission mechanism — banks may not pass on rate cuts to borrowers even if they have access to cheap RBI funds.

The global vs domestic inflation dynamic:

India’s inflation is influenced by both global and domestic factors. Global factors (2019-2023):

• COVID supply chain disruptions (2020-21) → spiked global goods prices
• Ukraine war (2022) → crude oil from $80 to $120/barrel, fertilizers, wheat prices surged
• Global monetary tightening (US Fed hiked from 0.25% to 5.5% in 18 months) → capital outflows from India, rupee pressure

Domestic factors:

• Monsoon variability → food prices
• Government-administered price changes (fuel taxes, electricity tariffs)
• Minimum Support Price (MSP) announcements → can push food prices up

RBI’s MPC has increasingly acknowledged that global inflation is outside its control — but it can manage domestic expectations and demand.

RBI-Specific Coverage

For RBI Grade B examination, you must know:

• The 2016 amendment to RBI Act, 1935 that formalised the inflation targeting framework
• The MPC composition: 6 members (3 RBI including Governor, 3 external). Each member has one vote; decisions by majority.
• The 6 annual MPC meetings — understand the bi-monthly cycle
• The difference between monetary policy stances: “accommodative” (cutting bias), “neutral”, “tightening” (hiking bias), “withdrawal of accommodation”
• Since February 2023, the stance has been “withdrawal of accommodation” — signalling that RBI is more concerned about inflation than growth
• Current rates as of late 2024: Repo 6.5%, MSF 6.75%, Reverse Repo 3.35%, CRR 4.5%, SLR 18%
• RBI’s Monetary Policy Report (published bi-annually) — provides inflation projections
• The concept of “policy lag” — monetary policy takes 12-18 months to fully impact inflation, making forward guidance critical

Case Study / Application

The 2020 COVID shock and RBI’s emergency monetary response:

When COVID-19 lockdowns were announced on 24 March 2020, economic activity came to a near-complete halt. GDP contracted 23.9% in Q1 FY21 (April-June 2020) — the worst in India’s recorded economic history.

RBI responded with the most aggressive monetary easing in its history:

• Repo rate cut from 5.15% to 4.0% in March 2020 (50 bps emergency cut, surprise)
• Further cut to 4.0% maintained through the year
• Targeted Long-Term Repo Operations (TLTRO) — ₹1 lakh crore at repo rate for banks to lend to corporate bonds and NBFCs
• Moratorium on term loan EMIs (March-August 2020) — prevented mass NPAs immediately
• Working capital financing for banks relaxed
• Emergency Credit Line Guarantee Scheme (ECLGS) — ₹3 lakh crore government-backed guarantee for MSME loans

The result: India’s recovery was V-shaped. GDP fell 7.3% in FY21 overall but rebounded to 9.7% in FY22 — one of the fastest recoveries among major economies. This was a vindication of RBI’s aggressive monetary response.

However, the inflation that resulted from rapid recovery and supply constraints — combined with global commodity price spikes from 2021-22 — forced RBI into the aggressive rate hiking cycle of 2022-23. You can see the policy cycle: Emergency easing (2020) → Normalisation (2021) → Tightening (2022-23).

GATE-level Numerical

Q: Assume the following data for an economy:

• Money supply (M) = ₹20,00,000 crore
• Velocity of money (V) = 2.5
• Real GDP (Y) = ₹50,00,000 crore (at constant prices)
• Price level (P) in base year = 1.0

Using the Quantity Theory of Money (M × V = P × Y), calculate: (a) The current price level and the implied inflation rate if the central bank increases M by 10% (b) If the nominal interest rate is 8% and expected inflation rises from 4% to 7%, what is the change in the real interest rate?

Working:

(a) Using Fisher equation approach: Original: M × V = P × Y 20,00,000 × 2.5 = P × 50,00,000 5,00,00,000 = P × 50,00,000 P = 100 (implied price index)

If M increases by 10%: New M = 22,00,000 crore New equation: 22,00,000 × 2.5 = P_new × 50,00,000 5,50,00,000 = P_new × 50,00,000 P_new = 110

Inflation rate = [(110 - 100) / 100] × 100 = 10%

(b) Fisher Equation: Real Interest Rate = Nominal Rate - Expected Inflation

• Original: Real rate = 8% - 4% = 4%
• New: Real rate = 8% - 7% = 1%
• Change in real rate = 4% - 1% = -3 percentage points (a 3 percentage point reduction in real returns)

Answer: (a) 10% inflation. (b) Real interest rate falls by 3 percentage points — meaning borrowing effectively becomes more expensive in real terms for lenders (who receive 1% instead of 4% real return), while borrowers benefit (repaying loans with devalued currency).

Multiple Perspectives

Academic view: Economists debate whether monetary policy can “supply-side” reduce inflation without growth costs. The New Keynesian view (dominant in academia) holds that central banks can reduce inflation without a permanent output loss if they act credibly and early. The Lucas Critique suggests that once people expect RBI to fight inflation credibly, inflation expectations anchor — and actual inflation falls without a recession. India’s 2022-23 experience partially supports this: inflation fell without the unemployment spike that would accompany a classical recession.

RBI/Regulatory view: RBI’s official position (expressed in MPC minutes) is that price stability is paramount — not because growth doesn’t matter, but because inflation is the enemy of growth. High inflation erodes the real value of savings, discourages investment, and disproportionately hurts the poor. RBI’s inflation credibility — demonstrated by bringing inflation down from 7.8% in April 2022 to 4.9% in October 2024 without a recession — is its most valuable institutional asset.

Practical/Industry view: The industry chamber surveys (CII, FICCI, ASSOCHAM) consistently express concern that rate hikes hurt investment sentiment and increase the cost of capital for businesses. They argue that India’s growth potential (8-9%) requires a prolonged period of low interest rates. Banks, however, welcome higher rates because it widens their net interest margin (NIM) — the difference between lending and deposit rates. MSMEs often find that even when RBI cuts rates, banks don’t pass on the cuts to small borrowers — transmission failure remains their primary complaint.

Recent Developments (2024-2026)

Recent monetary policy and inflation developments:

• RBI MPC meetings in 2024: Repo rate held at 6.5% from February 2024 through December 2024, with stance shifting from “withdrawal of accommodation” to “neutral” in the October 2024 meeting
• CPI inflation trajectory: peaked at 7.8% in April 2022 → fell to 4.9% in October 2024 → remained around 4.5-5.5% through late 2024
• Food inflation remained the primary concern — particularly pulses (12%+), spices, and vegetables (onion price spikes ahead of state elections)
• WPI remained in deflation (-2% to -3%) through 2024 — first sustained WPI deflation since 2020 COVID shock
• RBI’s ₹2.11 lakh crore dividend to government (March 2024) — RBI transferred excess provisions built for contingency; this was a significant fiscal boost
• UPI transaction value crossed ₹20 lakh crore per month in 2024 — digital payments expansion continues to formalise the economy and improve monetary policy transmission
• RBI’s New Monetary Policy Framework review (2025): Discussions on potentially shifting to a single monetary policy rate framework, further strengthening the repo rate as the sole policy rate
• Global context: US Fed began rate cuts in September 2024 (from 5.5% to 4.75% by December 2024) — easing global financial conditions; India’s external vulnerability reduced as rupee stabilised around ₹83-84/$
• RBI introduced the Unhedged Foreign Exchange Exposure guidelines (2024) — requiring companies to hedge forex exposure; prevents corporate losses from currency volatility feeding into inflation
• The Account Aggregator framework expanded — enabling individuals and businesses to share financial data across institutions, improving credit assessment for small borrowers; RBI estimates this can unlock ₹20 lakh crore in credit supply

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