The Reserve Bank of India (RBI) plays a very important role in controlling inflation and maintaining monetary stability in India through the implementation of monetary policy tools. Its primary objective is to ensure price stability while also fostering economic growth.

The RBI uses important policy tools like the repo rate, reverse repo rate, and cash reserve ratio (CRR), Open Market Operations, etc. to control inflation. The RBI affects the economy’s credit cost and liquidity by changing these rates. Raising the repo rate, for example, increases the cost of borrowing, which reduces surplus demand and inflationary pressures. Lowering rates, on the other hand, encourage borrowing and spending, which boosts economic activity but may also raise the danger of inflation.

These regulations have an immediate effect on the banking industry and the overall economy. Based on the policy rates set by the RBI, banks, being the principal financial intermediaries, modify their lending rates. Banks may raise loan interest rates to consumers as a means of covering their increased borrowing expenses, such as when repo rates rise. On the other hand, reduced rates result in lower borrowing costs, which promote consumption and investment.

Hence, the ultimate objective of RBI policy is to achieve a balance between economic expansion and inflation control.