Monetary Policy and RBI Tools

CRR and SLR

• The Cash Reserve Ratio (CRR) is the part of deposits banks must keep with the RBI as reserves. It earns no interest.
• The Statutory Liquidity Ratio (SLR) needs banks to hold part of deposits in approved liquid assets, like government securities.
• Cutting either ratio frees funds for banks to lend, and boosts credit. Raising either does the opposite.
• CRR and SLR manage overall system liquidity. They do not set interest rates directly.

Repo and Reverse Repo

• The Repo Rate is what the RBI charges commercial banks for short-term funds. It is the key policy rate.
• The Reverse Repo Rate is what banks earn for parking surplus funds with the RBI.
• These rates fine-tune short-term interest rates directly. They do not change the total pool of lendable funds.

The Monetary Policy Committee

• India’s Monetary Policy Committee (MPC) sets the policy Repo Rate.
• It has six members and is chaired by the RBI Governor, not the Union Finance Minister.
• Its structure is fixed by law. It is not reconstituted every year.

The Liquidity Adjustment Facility

• The Liquidity Adjustment Facility (LAF) lets eligible institutions borrow or park funds with the RBI for the short term.
• The window is mainly open to Scheduled Commercial Banks and Primary Dealers.
• NBFCs, as a general category, have no direct access.

Open Market Operations and sterilization

• Open Market Operations (OMOs) are the RBI buying or selling government securities. They are its main tool for managing banking-system liquidity.
• When the RBI buys foreign currency, that puts rupees into the system.
• It then sells government securities through OMOs to soak up the extra liquidity.
• That is called sterilization.

Lender of last resort

• As lender of last resort, the RBI gives liquidity to banks in a temporary crisis.
• It is not routine day-to-day funding.
• It does not cover lending to trade or industry bodies.
• It is separate from the RBI’s “Banker to the Government” role.

Why the shift to inflation targeting

• Before 2016, the RBI weighed growth, inflation and exchange-rate stability, with no formal numeric anchor.
• The Urjit Patel Committee’s 2014 report recommended flexible inflation targeting.
• The Government and RBI signed a formal framework agreement in February 2015.
• Parliament amended the RBI Act in May 2016.
• Since August 2016, the RBI targets 4% CPI inflation, with a 2–6% tolerance band, set in law.

Different levers, one goal

• CRR and SLR manage overall liquidity. Repo and Reverse Repo fine-tune short-term rates.
• The shared goal is price stability.

4 May 2022: two tools in one day

• The RBI raised the Repo Rate by 40 basis points and the CRR by 50 basis points on the same day.
• CPI inflation was heading past 7%, above the RBI’s 6% upper limit.
• The rate hike made borrowing costlier at once.
• The CRR hike drained cash straight out of the banking system.
• So the squeeze came from both directions.

What the MPC does not control

• The MPC’s formal, rules-based framework replaced a more discretionary approach used earlier.
• But CRR, SLR and OMOs sit outside the MPC’s mandate.
• The RBI runs them separately.
• Read more in Reserve Bank of India (RBI), Central Banking and Money and Monetary Concepts.

MPC meeting, 5 August 2026

• The MPC unanimously kept the repo rate unchanged at 5.25%, and kept its neutral stance, under Governor Sanjay Malhotra.
• The RBI raised its FY27 GDP growth forecast to 6.7% from 6.6%.
• It cut its CPI inflation forecast to 5% from 5.1%, with a peak expected in October–December.
• The MPC flagged risks from West Asia tensions, oil prices, a weak El Niño-affected monsoon and global trade uncertainty.
• The next meeting is scheduled for 5–7 October 2026.
• Full coverage: RBI Keeps Repo Rate Unchanged at 5.25%.