Pariksha SaathiLesson 3 of 10 · Banking and Financial Awareness
Monetary Policy Tools: CRR, SLR, Repo, SDF, MSF and the MPC
Drafted with AI assistance and fact-checked on 28 October 2026; not yet read line by line by a human editor. Spotted a mistake? Tell us. Editorial standards & corrections
What monetary policy does
Monetary policy is the RBI's management of the cost and supply of money. When inflation is high the RBI tightens: it raises its policy rate or draws money out of the banking system, so loans become costlier and spending cools. When growth is weak and inflation is low it eases. Its tools are of two kinds. Quantitative or general tools, such as CRR, SLR, the repo rate, open market operations and the bank rate, change the total volume and price of credit. Qualitative or selective tools, such as margin requirements on loans against goods, credit ceilings, moral suasion and direct action, change where credit flows.
CRR and SLR
The cash reserve ratio (CRR) is the share of a bank's net demand and time liabilities (NDTL, broadly its deposits) that it must keep as a cash balance with the RBI under section 42 of the RBI Act; the RBI pays no interest on it. The statutory liquidity ratio (SLR) is the share of NDTL that a bank must keep with itself in cash, gold or approved government securities under section 24 of the Banking Regulation Act, which caps it at 40 per cent. Raising either ratio locks up more of each deposit and leaves banks less to lend, so liquidity tightens; cutting it frees funds. CRR acts directly on money, while SLR also makes banks hold safe government securities.
Repo, reverse repo and SDF
A repo (repurchase agreement) is a short-term loan in which a bank sells government securities to the RBI and agrees to buy them back at a higher price; the difference is interest at the repo rate. The repo rate is the policy rate, the main signal of the RBI's stance, and changes in it pass through to deposit and loan rates. In a reverse repo the RBI borrows surplus money from banks against securities. The standing deposit facility (SDF), recommended by the Urjit Patel Committee in 2014 and enabled by a 2018 amendment to section 17 of the RBI Act, lets the RBI absorb surplus funds without giving securities in return, so it is not limited by the stock of securities it holds.
MSF and bank rate
The marginal standing facility (MSF), introduced in 2011, lets a bank borrow overnight from the RBI at a rate above the repo rate, even by dipping into its SLR securities up to a set limit, when the interbank market dries up. It is a penal, emergency window. The bank rate, under section 49 of the RBI Act, is the standard rate at which the RBI buys or rediscounts bills of exchange and other commercial paper. It is now aligned with the MSF rate and is used mainly to fix penal interest on shortfalls in reserves.
LAF and the corridor
The liquidity adjustment facility (LAF), introduced in June 2000 on the advice of the Narasimham Committee (1998), is the framework through which the RBI adds or absorbs day-to-day liquidity using repo and reverse repo operations, fixed-rate and variable-rate auctions, the SDF and the MSF. The policy repo rate sits in the middle of a corridor. The MSF rate is the ceiling, because no bank should need to pay more overnight, and the absorption rate (the SDF rate, earlier the fixed reverse repo rate) is the floor. The RBI tries to keep the weighted average call rate, its operating target, close to the repo rate.
Open market operations
OMOs are outright purchases or sales of government securities by the RBI in the market. When the RBI buys securities it pays money into the banking system and adds lasting liquidity; when it sells them it pulls money out. The Market Stabilisation Scheme of 2004 lets the government issue extra securities to absorb surplus money, for example from large foreign inflows, keeping the proceeds in a separate account. OMOs, foreign exchange swaps and CRR changes deal with lasting liquidity, while the LAF handles daily needs.
MPC and inflation targeting
The Finance Act 2016 amended the RBI Act to give flexible inflation targeting a legal basis, following the Urjit Patel Committee report (2014) and a monetary policy framework agreement of February 2015. Under section 45ZA the central government, in consultation with the RBI, sets an inflation target based on the Consumer Price Index once every five years; the first target was 4 per cent with a tolerance band of 2 to 6 per cent. Under section 45ZB a six-member Monetary Policy Committee decides the policy repo rate: three members from the RBI (the Governor, who chairs and has a casting vote, the Deputy Governor in charge of monetary policy and one officer nominated by the Central Board) and three external members appointed by the government for four years. It meets at least four times a year, needs a quorum of four and decides by majority. If inflation stays outside the band for three consecutive quarters, the RBI must report the reasons and remedial steps to the government. The MPC sets only the repo rate; CRR, SLR and the other rates are decided by the RBI.
Key facts
- CRR: share of NDTL kept as cash with the RBI under section 42 of the RBI Act; the RBI pays no interest on it.
- SLR: share of NDTL held by the bank itself in cash, gold or approved government securities under section 24 of the BR Act; ceiling 40 per cent.
- Repo: the RBI lends to banks against government securities; reverse repo: the RBI borrows from banks; the repo rate is the policy rate set by the MPC.
- SDF absorbs liquidity without collateral; recommended by the Urjit Patel Committee (2014) and enabled by a 2018 amendment to the RBI Act.
- MSF (2011): overnight emergency borrowing above the repo rate, partly against SLR securities; the MSF rate is the ceiling of the LAF corridor and the bank rate is aligned with it.
- LAF began in June 2000 on the Narasimham Committee (1998) advice; the operating target is the weighted average call rate.
- OMO purchase of securities injects liquidity and OMO sale absorbs it; raising CRR or SLR absorbs liquidity and cutting them injects it.
- MPC: 6 members, 3 from the RBI and 3 external (four-year term); quorum 4; Governor has the casting vote; meets at least 4 times a year.
- First inflation target under the 2016 framework: CPI inflation of 4 per cent with a band of 2 to 6 per cent; failure means three consecutive quarters outside the band.
Quick revision
CRR (section 42 RBI Act, cash with RBI, no interest); SLR (section 24 BR Act, cash, gold, G-secs, ceiling 40%); repo = RBI lends, reverse repo = RBI borrows; SDF absorbs without collateral (Urjit Patel Committee 2014, amendment 2018); MSF 2011 = corridor ceiling, bank rate aligned with it; LAF June 2000; OMO buy injects, sell absorbs; MSS 2004; MPC under section 45ZB, 6 members, quorum 4, sets only the repo rate; first CPI target 4% (2-6%).