What monetary policy reforms were put into place by Indian officials in response to the COVID-19 outbreak and the 2008 global financial crisis?

The government of India had implemented a well-judged blend of fiscal and monetary policies to mitigate the impact of the global financial crises of 2008. 

Significant monetary policy reforms were carried out by India’s monetary authorities between October 2008 and April 2009, including a 425 basis point drop in the repo rate, a 400 basis point drop in the cash reserve ratio, and a 275 basis point drop in the reverse repo rate.


Given that it was a worldwide disaster that affected many developed nations, Central Banks had to go for major changes in their policies. Take a look at how the measures taken by RBI are different from those taken by Central Banks of other countries:

  • Counterparties involved were Banks for the process of Liquidity infusion even for the Mutual funds, Housing finance companies and NBFCs.
  • Unlike mortgage securities and commercial papers in advanced countries, collateral standards, which mostly consisted of government securities, were not diluted but kept as they were.
  • Due to the release of previously sterilised cash (a type of monetary policy in which a central bank tries to reduce the impact of capital inflows and outflows on the money supply), the Reserve Bank’s balance sheet did not exhibit extraordinary growth despite a significant injection of liquidity, contrary to the general pattern.
  • Better sequencing of monetary and liquidity interventions was made possible by the availability and use of numerous tools.

Financial stability was improved through the application of pro-cyclical provisioning requirements and counter-cyclical regulations before the global financial crisis.

Monetary policy by RBI


Policy rate determination to achieve the inflation target is determined by Section 45ZB of the Reserve Bank of India.


Since variations in the Repo rate ripple across the money market to affect the entire financial system, it is a significant factor in determining inflation and growth. The RBI Act of 1934 was revised in May 2016 and now clearly states that the monetary policy framework must be operated by law.

The Reserve Bank of India (RBI) has put in place an operating framework to anchor money market rates at or close to the repo rate as part of its monetary policy changes. With this methodology, the policy (repo) rate is decided upon after a present and upcoming macroeconomic environment assessment. Following the selection of the repo rate, the weighted average call rate (WACR), which serves as the operating target, is intended to be centred around the repo rate by the RBI’s liquidity management operations on a daily basis.

Depending on the evolving financial market and monetary conditions while ensuring consistency with the monetary policy stance, the operating framework designed goes in tune with these conditions.


Goals of the Monetary Policy

  • The prime goal of monetary policy in India is to maintain price stability while not ignoring the objective of growth.
  • In May 2016, the RBI Act, 1934 amendment was made to provide a legal statute to RBI, for the implementation of the flexible inflation targeting framework.
  • The amended RBI Act mandated the Government of India to set the inflation target in consultation with the Reserve Bank, once every five years.
  • As a result, Central Government through the Official Gazette notified the following:

                                  Consumer Price Index Inflation target 

                                  March 31, 2024, through August 5, 2016
Inflation Target  Upper tolerance limit Lower tolerance limit
4%  6% 2% (4 ‡ 2 per cent)
  • The Central Government maintained the inflation target and the tolerance zone (4 2%) as of March 31, 2021, for the period of April 1, 2021, to March 31, 2026.

The Monetary Policy Process

The Government of India formally notified the provision for the formation of a six-member monetary policy committee (MPC) in accordance with Section 45ZB of the modified RBI Act, 1934 as part of its monetary policy reforms. On September 29, 2016, this unique committee (MPC) was established.

According to the Central Government’s announcement in the Official Gazette of October 5, 2020, the current MPC members are as follows:

  1. The Governor of the Reserve Bank of India is the ex officio chairperson.
  2. Member, ex officio, of the Reserve Bank of India’s Monetary Policy Deputy Governor;
  3. The Central Board will propose one Reserve Bank of India officer as an ex officio member.;
  4. Member of the Indira Gandhi Institute of Development Research and Professor Ashima Goyal;
  5. Professor Jayanth R. Varma, a member of the Indian Institute of Management in Ahmedabad;
  6. Dr Shashank Bhide, Senior Advisor, National Council of Applied Economic Research, Delhi-Member.

(The members mentioned at points 4 through 6 above will serve for a term of four years or until further orders, whichever comes first.)


Instruments of Monetary Policy

The MPC chooses the policy interest rate necessary to hit the inflation goal. The following list includes a number of direct and indirect tools used to implement the monetary policy: 

  • Reverse Repo Rate
  • Repo Rate
  • Liquidity Adjustment Facility (LAF)
  • Marginal Standing Facility (MSF) 
  • LAF Corridor, Bank Rate 
  • Cash Reserve Ratio (CRR)
  • Statutory Liquidity Ratio (SLR)
  • Open Market Operations (OMOs)
  • Market Stabilisation Scheme (MSS) 
  • Standing Deposit Facility (SDF)

Open and Transparent Monetary Policy Making

According to the RBI Act, as amended, monetary policy is decided as follows:

  • Each year, the MPC must hold at least four meetings.
  • Four members constitute the quorum for MPC meetings.

Casting vote: In the event of a tie vote, the Governor has a second, or casting, vote. Each MPC member has one vote.

The minutes of the MPC’s proceedings are published on the 144th day and contain the following information:

  1. The MPC’s resolution
  2. Each member’s vote on the resolution, as attributable to that member; and
  3. Each member’s comments on the adopted resolution.

Every six months, the Reserve Bank is required to produce a report titled “Monetary Policy Report” to clarify the.:

  1. The Root cause of inflation; and
  2. Foretell of inflation for 6-18 months ahead.

Failure of MPC?

Let’s understand what led to the failure of monetary policy reforms.

The failure of the RBI to meet the inflation target would be seen as occurring in the following conditions:

For any three consecutive quarters, either:

  • The average inflation exceeds the inflation target’s upper tolerance level; 


  • The average inflation falls below the inflation target’s lower tolerance level.

Obligations on MPC

The Central Government has given the discretion to define what constitutes a failure to reach inflation targets under Section 45ZN of the RBI Act, as well as the consequences of such failure.

In accordance with subsections (a), (b), and (0) of Section 45ZN of the RBI Act, the Bank is obligated to inform the Central Government in writing of the following when the inflation objective is not met: 

  1. the causes of the inflation target’s non-attainment
  2. the responsive actions prepared by banks to counter the adversity 
  3. Time period estimation within which inflation can be fulfilled in consonance with the responsive actions taken

In case the RBI fails to meet the target inflation then a separate meeting has to be scheduled by the Secretary to the Committee, as part of the normal policy process and as per regulation 7 of the RBI MPC and Monetary policy process regulation, 2016, to discuss and account to the Central government within a month from the date on which bank fails to meet the inflation target.


The Reserve Bank of India (RBI) has put in place a number of measures to mitigate the impact of COVID-19 in India as part of its monetary policy changes.

The implementation of developmental and regulatory policies is one of these initiatives, which is a component of the Special Economic Package and the “Atmanirbhar Bharat Abhiyaan” unveiled by the Indian government to relieve financial stress. Following are a few of the significant monetary reforms the RBI implemented in response to COVID-19:

  1. Cash flow management
  2. The directive, administrative and supervision-related decisions
  3. Financial Markets related decisions

In the remaining article, we’ll talk about the RBI’s counteractive policies in detail.

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A. To manage the cash flow in the market

Targeted Long-Term Repo Operations (TLTROs)

To induce fresh liquidity in the market during the surge of panic and large sell-off, RBI conducted auctions of targeted term repos. The liquidity received from this by banks was utilised in an investment-grade corporate bond, commercial paper and non-convertible debentures, over and above the outstanding level of their investments in these bonds.

Reduced CRR

RBI reduced the cash reserve ratio by straight 100 basis points, to 3.0% of NDTL (net demand and time liabilities) with effect from 28 March 2020, for a period of a year. Thus, released liquidity of nearly Rs.1,37,000 crores across the banking system.

Broadening of the Monetary Policy Rate Corridor

Concerned about steady excess liquidity, RBI broadened the existing policy rate corridor from 50 base points to 65 base points and under the new corridor, the reverse repo rate under the liquidity adjustment facility (LAF) was 40 bps lower than the policy repo rate, as against the existing 25 bps. The marginal standing facility (MS) rate continued to be 25 bps above the policy repo rate.

Lowering the Fixed-Rate Reverse Repo Rate

To provide sufficient cash flow in the system RBI reduced the fixed rate reverse repo rate under LAF (liquidity adjustment facility by 25 basis points that is from 3.75% to 4.0%.

Special Liquidity Facility for Mutual Funds (SLF-MF)

For mutual funds, the RBI created a special liquidity facility worth Rs. 50,000 crores. Banks were instructed to use the funds made available through the SLF-MF only for the purpose of helping MFs meet their liquidity needs through loans, the outright purchase of MFs’ holdings of investment-grade corporate bonds, commercial papers, debentures, and certificates of deposit, and/or repossessions against those holdings.

Introduced G-SAP and VRRR

For the first quarter of Fiscal Year 2023, RBI planned to buy government securities worth Rs 1 lakh crore, and to that aim, it implemented the government securities acquisition programme (G-SAP).

The RBI continued to offer variable rate reverse repos (VRRR) at the short end at the same time because liquidity was already in significant excess.

TLTRO 2.0 (Targeted Long-Term Operations) 

For an aggregate amount of Rs. 50,000 crores, RBI conducted targeted long-term repo operations (TLTRO 2.0) and the fund availed by banks under TLTRO 2.0 was supposed to be invested in investment-grade bonds, commercial paper, and non-convertible debentures of NBCs, with at least 50 per cent of the total amount availed to made available to the small and mid-sized NBCs and MFIs.


Here RBI allowed banks to extend cash flow by keeping government securities with the central bank and subsequently reinvesting the aforementioned cash into the economy.

Access to Emergency Health Services Will Be Made Easier via a Short-Term Liquidity Facility

An on-tap liquidity window of Rs. 50,000 crores with tenors of up to three years at the repo rate was opened until March 31, 2022, in order to increase the provision for immediate liquidity for the scheme, which would allow banks to offer new lending support to a variety of entities connected to the healthcare system.

B. Regulation and Supervision Moratorium on Term Loans

The Reserve Bank of India (RBI) permitted lenders to impose a 3-month moratorium on term loans as part of its monetary policy reforms, effective as of March 15, 2020, for all commercial banks, including regional, rural, small finance banks, cooperative banks, All India Financial Institutions, and NBCs, including housing finance companies and microfinance institutions.

Easing of Working Capital Financing

By lowering margins and/or re-evaluating the borrowers’ working capital cycle, lenders were permitted to recalculate drawing power. The RBI further stated that such a measure would not lead to a downgrade in asset categorization.

Concerning stress due to COVID-19, RBI decided to put off the NSF guidelines implementation.

Suspension of the Last Tranche of Capital Conservation Buffer

The deadline date for meeting the last tranche of the capital conservation buffer was extended for another six months.

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