Pariksha SaathiLesson 4 of 10 · Indian Economy
RBI and Monetary Policy: CRR, SLR, Repo, 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
The central bank
The Hilton Young Commission (Royal Commission on Indian Currency and Finance, 1926) recommended setting up a central bank for India. The RBI Act 1934 created the Reserve Bank, which began work on 1 April 1935 in Calcutta, moved its central office to Bombay in 1937 and was nationalised on 1 January 1949. Its first Governor was Sir Osborne Smith and its first Indian Governor C.D. Deshmukh. The RBI issues currency notes, is banker to the government and the bankers' bank, acts as lender of last resort, regulates banks, keeps the foreign exchange reserves and manages public debt. Its central task is monetary policy: using interest rates and the supply of money to keep prices stable while supporting growth.
The framework since 2016
After the Urjit Patel Committee (2014) and a Monetary Policy Framework Agreement signed by the government and the RBI in February 2015, the Finance Act 2016 amended the RBI Act to give flexible inflation targeting a legal basis. The primary objective of monetary policy became price stability, keeping in mind the objective of growth. The central government, in consultation with the RBI, sets the inflation target in terms of CPI (Combined) once every five years; the first target, notified in 2016, was 4 per cent with a tolerance band of 2 to 6 per cent. If average inflation stays outside the band for three consecutive quarters, the RBI is held to have failed and must report to the government the reasons and the remedial action it proposes.
The Monetary Policy Committee
The Monetary Policy Committee (MPC), first constituted in 2016, fixes the policy repo rate. It has six members: the RBI Governor as chairperson, the Deputy Governor in charge of monetary policy, one RBI officer nominated by the central board, and three external experts appointed by the central government for four years, who cannot be reappointed. It must meet at least four times a year, the quorum is four, each member has one vote, and the Governor has a second or casting vote in a tie. The minutes, published after each meeting, show every member's vote and statement.
Reserve ratios and the repo rate
The Cash Reserve Ratio (CRR, Section 42 of the RBI Act) is the share of a bank's net demand and time liabilities that must be kept as cash with the RBI; it earns no interest. The Statutory Liquidity Ratio (SLR, Section 24 of the Banking Regulation Act 1949) is the share a bank must hold itself in cash, gold or approved government securities. The repo rate is the rate at which the RBI lends short-term money to banks against government securities under the Liquidity Adjustment Facility (LAF, introduced in 2000); it is the policy rate that signals the stance of policy. The reverse repo rate is the rate at which the RBI absorbs surplus money from banks against securities.
The corridor and other quantitative tools
The Marginal Standing Facility (MSF), introduced in 2011, lets banks borrow overnight at a rate above the repo rate, even by dipping into their SLR securities, so the MSF rate is the ceiling of the interest-rate corridor. The Standing Deposit Facility (SDF), introduced in April 2022, lets the RBI absorb surplus money without giving securities as collateral; its rate, below the repo rate, replaced the fixed reverse repo rate as the floor of the corridor. The bank rate (Section 49 of the RBI Act) is the rate at which the RBI rediscounts bills; it is now aligned with the MSF rate and used for penalties on reserve shortfalls. Open market operations (OMO) are purchases and sales of government securities: buying injects money, selling absorbs it. The Market Stabilisation Scheme (2004) lets the RBI absorb money created by large foreign inflows.
Qualitative tools
Selective or qualitative tools direct credit towards or away from particular uses rather than changing its total. They include margin requirements (raising the margin on loans against a commodity cuts the credit available for hoarding it), credit rationing and ceilings, regulation of consumer credit, directed lending such as priority sector lending, moral suasion (persuading banks through advice and meetings) and direct action against banks that ignore RBI directions.
How a repo change reaches borrowers
When the MPC raises the repo rate, banks pay more for funds from the RBI and the money market, so they raise deposit and lending rates; borrowing becomes costlier, spending cools and inflation eases. A cut works the other way. Transmission used to be slow because loans were priced on internal benchmarks: the Benchmark Prime Lending Rate, then the Base Rate from July 2010 and the Marginal Cost of Funds based Lending Rate (MCLR) from April 2016. From 1 October 2019 the RBI required banks to link new floating-rate loans to retail borrowers and to micro and small enterprises to an external benchmark such as the repo rate, so a repo change now reaches home and vehicle loan EMIs much faster.
Key facts
- RBI: Hilton Young Commission 1926; RBI Act 1934; began 1 April 1935 in Calcutta; moved to Bombay 1937; nationalised 1 January 1949; first Indian Governor C.D. Deshmukh.
- CRR: share of NDTL kept as cash with the RBI, no interest (Section 42, RBI Act); SLR: cash, gold and approved securities kept by the bank itself (Section 24, BR Act 1949).
- Repo: RBI lends to banks against securities (the policy rate, under LAF from 2000); reverse repo: RBI absorbs money from banks.
- Corridor: SDF (April 2022, no collateral) is the floor, MSF (2011) the ceiling, repo in between; the bank rate is aligned with MSF.
- OMO: RBI buys government securities to inject money and sells them to absorb it; the Market Stabilisation Scheme (2004) absorbs liquidity from foreign inflows.
- Flexible inflation targeting: RBI Act amended by the Finance Act 2016; target set by the government every five years on CPI (Combined); first target 4 per cent within a 2-6 per cent band.
- MPC: 6 members (3 from RBI with the Governor as chair, 3 external for 4 years, not reappointable); quorum 4; at least 4 meetings a year; Governor has a casting vote.
- Qualitative tools: margin requirements, credit rationing, consumer credit regulation, priority sector lending, moral suasion, direct action.
- Lending benchmarks: Base Rate (July 2010), MCLR (April 2016), external benchmark such as the repo rate for new floating-rate retail and MSE loans (1 October 2019).
- Failure of the target: average inflation outside the band for three consecutive quarters; the RBI must explain the reasons and remedies to the government.
Quick revision
RBI Act 1934, began 1 April 1935, nationalised 1949; flexible inflation targeting via Finance Act 2016 (Urjit Patel Committee 2014), target on CPI (Combined) every 5 years, first 4% (2-6%); MPC 6 members, Governor casting vote, quorum 4; CRR with RBI (Sec 42), SLR with bank (BR Act Sec 24); repo = policy rate under LAF; SDF floor (2022), MSF ceiling (2011), bank rate = MSF; OMO, MSS 2004; qualitative: margins, moral suasion; MCLR 2016, external benchmark 1 Oct 2019.