Is It Time to Redesign India’s Monetary Policy Framework? See What RBI’s Review Says

Central bank releases discussion paper to review inflation target, liquidity system and loan structure

In April 2025, India’s retail inflation dropped to 3.16 percent. The rate stayed within RBI’s 2 to 6 percent band, but questions started coming in. Should India change its monetary policy system if credit and inflation patterns are no longer the same?

RBI released a discussion paper on 11 August 2025. It invited feedback on the current structure before its term ends in March 2026.

What Exactly Is India’s Current Monetary Policy System?

The Reserve Bank of India follows a system called inflation targeting. This started in 2016, after it was added to the RBI Act. The main aim is to keep inflation under control while supporting growth.

Now, the RBI wants to check if this system still works well. People have changed how they borrow. Banks are also quicker in adjusting interest rates. That’s why the RBI feels it is time to revisit the entire process.

Here's what the current framework looks like:
 

These methods may have worked for a time. But now, RBI says, it needs checking again.

Why RBI Feels the System Needs an Update

Inflation targeting means RBI sets a goal for inflation and adjusts repo rate to match it. It looks simple, but India’s inflation is often pushed by food or fuel prices. These are not easy to manage with repo rate moves.

RBI also observed that banks now link loans to external benchmarks more than before. That means interest rates respond faster. In 2020, only 28 percent of loans were benchmark-linked. By mid-2025, it was more than 51 percent.

And as LoansJagat noted in an October 2025 update, despite these benchmark changes, many NBFC borrowers still didn’t fully benefit from earlier rate cuts. That gap may reduce the impact of future policy moves if left unaddressed.
 

These changes make a case for redesigning India’s monetary framework for economic stability.

Is This the First Time RBI Is Reviewing Its Policy Framework?

Back in 2015, inflation was high and growth was slow. RBI kept cutting rates, but loans didn’t get cheaper fast. Banks were slow to pass it on. No formal review was done then.

This time, the RBI started early. And this time, the market is quicker in reacting. That difference matters.

Also, past articles raised the same issue. For example, in 2023, this piece questioned why repo rate cuts weren’t helping borrowers.

So the same problem is being handled in a different way now.

Conclusion 

RBI will collect comments till September 18, 2025. Any changes will likely come before March 2026. The RBI evaluation of current monetary policy structure could bring changes. Maybe new liquidity tools. Or maybe a new inflation target.

It’s not confirmed yet. But the direction is clear. The future of India’s monetary policy after RBI’s review might not look like the old one. That’s how it looks right now. Let’s wait and see what changes.
 

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