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Relevance: GS Paper 3 — Indian Economy, Monetary Policy & RBI Source: RBI MPC Statement, June 2026

1 · What happened

In its June 2026 policy review, the RBI Monetary Policy Committee (MPC), chaired by Governor Sanjay Malhotra, lowered the FY27 growth forecast and raised the inflation forecast. The Governor also said the RBI is at an early stage of looking at plastic (polymer) banknotes to cut the rising cost of managing cash.

Three big worries drove the shift: rising crude oil prices linked to the West Asia conflict, costlier imports, and a likely weak south-west monsoon.

2 · Macro Picture & the Polymer Notes Idea

The MPC is the 6-member panel under the RBI Act that sets the repo rate to keep CPI inflation near a 4% target. Its June 2026 update points to a tougher year for growth and prices, while the polymer notes proposal is aimed at cutting long-term currency printing costs.

New forecasts
FY27 Growth & Inflation
GDP growth forecast lowered to 6.6% (from 6.9%). CPI inflation raised to 5.1% (from 4.6%). Core inflation also up — from 4.4% to 4.7%.
Defending the rupee
RBI Response Steps
Used forex reserves (now $682.3 billion, about 11 months of import cover); eased External Commercial Borrowing (ECB) rules for PSUs; pushed banks to gather more FCNR deposits.
Cash management
Polymer Banknotes Idea
Made from plastic (BOPP film). More durable, water-resistant, harder to fake, and recyclable. Hurdles: ATM upgrades and India’s varied climate. India ran a pilot in 2012–14.
Main risks
Global & Climate Headwinds
West Asia conflict has lifted crude oil above the $85/barrel base; commercial LPG, base metals, chemicals and rubber are dearer; El Niño and a sub-normal monsoon threaten farm output.

  • Rupee under pressure: The rupee has weakened by over 5% since March 2026, recently touching ₹97 against the US dollar.
  • Cost of cash: RBI spent ₹6,372.8 crore on note printing in FY25 and removed about 23.8 billion soiled notes from circulation in the same year.
  • 2012–14 polymer pilot: One billion ₹10 polymer notes were tested in Kochi, Mysore, Jaipur, Bhubaneswar and Shimla. The plan was later shelved due to technical and operational issues.

UPSC Value Box
Flexible Inflation Targeting (FIT) The legal target set for the RBI — to keep retail CPI inflation around 4%, within a tolerance band of 2% to 6% over the medium term.
Core inflation Inflation calculated after removing food and fuel, which are the most volatile parts of the consumer basket. It shows the underlying demand pressure in the economy.
Import cover A measure of how many months of imports a country can pay for using only its current foreign exchange reserves. A common gauge of external-sector resilience.
External Commercial Borrowings (ECB) Loans taken by Indian companies or PSUs from foreign lenders, usually in foreign currency. Helps bring dollars into the country.
FCNR Deposit Foreign Currency Non-Resident deposit — a fixed deposit opened in India by an NRI in foreign currency, which adds to forex inflows.
BOPP Bi-axially Oriented Polypropylene — the thin, strong plastic film used to make polymer banknotes.
e-Rupee (CBDC) India’s Central Bank Digital Currency, issued by the RBI as a digital form of the rupee. Runs parallel to physical cash.

MCQ Practice Question
Q. With reference to India’s monetary policy framework and currency management, consider the following statements:

  1. Under Flexible Inflation Targeting, the RBI is required to keep retail Consumer Price Index (CPI) inflation at 4%, within a tolerance band of 2% to 6% over the medium term.
  2. “Core inflation” refers to inflation in food items and fuel, which together form the most volatile part of the consumer basket.
  3. Polymer banknotes are made from synthetic substrates such as bi-axially oriented polypropylene (BOPP), and India had piloted ₹10 polymer notes between 2012 and 2014.

Which of the statements given above is/are correct?
(a) 1 and 2 only    (b) 2 and 3 only    (c) 1 and 3 only    (d) 1, 2 and 3

Answer: (c) 1 and 3 only

  • Statement 1 — Correct: Under Flexible Inflation Targeting, adopted in 2016, the RBI must keep retail CPI inflation at 4%, within a band of 2% to 6% over the medium term.
  • Statement 2 — Incorrect (the trap — reversed definition): Core inflation excludes food and fuel — it strips out the volatile components, it does not include them. The remaining items reveal the underlying demand pressure in the economy.
  • Statement 3 — Correct: Polymer notes are made from BOPP. India ran a field trial in 2012–14 with one billion ₹10 polymer notes across Kochi, Mysore, Jaipur, Bhubaneswar and Shimla.

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