What is Monetary Policy (and Repo Rate)?
Historical Background
Key Points
9 points- 1.
Inflation Targeting: The primary objective is to maintain retail inflation within the target band of 4% +/- 2%.
- 2.
Policy Rate (Repo Rate): The main tool used to signal the monetary policy stance. An increase makes borrowing costlier, reducing money supply and curbing inflation; a decrease does the opposite.
- 3.
Monetary Policy Committee (MPC): A six-member committee (3 RBI officials, 3 external members) responsible for fixing the policy rate to achieve the inflation target.
- 4.
Liquidity Adjustment Facility (LAF): Includes Repo Rate and Reverse Repo Rate, used for managing day-to-day liquidity in the banking system.
- 5.
Cash Reserve Ratio (CRR): The percentage of a bank's Net Demand and Time Liabilities (NDTL) that it must keep with the RBI as cash.
- 6.
Statutory Liquidity Ratio (SLR): The percentage of a bank's NDTL that it must maintain in liquid assets like government securities, gold, and cash.
- 7.
Marginal Standing Facility (MSF): A window for banks to borrow from the RBI in an emergency situation when inter-bank liquidity dries up, at a rate higher than the repo rate.
- 8.
Open Market Operations (OMOs): Buying or selling government securities by the RBI to inject or absorb liquidity from the system.
- 9.
Monetary Policy Stance: Describes the RBI's approach (e.g., accommodative, neutral, calibrated withdrawal of accommodation) based on economic conditions.
Visual Insights
Monetary Policy: Tools, Objectives & Framework
This mind map outlines the key components of India's monetary policy, including its objectives, the Monetary Policy Committee (MPC), and the various tools employed by the RBI to manage money supply and credit.
Monetary Policy
- ●Objectives
- ●Monetary Policy Committee (MPC)
- ●Quantitative Tools (Indirect)
- ●Qualitative Tools (Direct)
Key Monetary Policy Tools: CRR vs. SLR
This table provides a concise comparison of two fundamental quantitative monetary policy tools, Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), highlighting their differences and implications.
| Feature | Cash Reserve Ratio (CRR) | Statutory Liquidity Ratio (SLR) |
|---|---|---|
| Definition | Percentage of Net Demand and Time Liabilities (NDTL) banks must keep with RBI as cash. | Percentage of NDTL banks must maintain in liquid assets (cash, gold, approved securities). |
| Form of Holding | Only in cash with RBI. | Cash, gold, or unencumbered approved securities. |
| Purpose | To control liquidity in the banking system and ensure solvency; acts as a reserve. | To ensure banks have sufficient liquid assets to meet unforeseen demands and to fund government borrowing. |
| Returns | Banks earn no interest on CRR balances. | Banks earn interest/returns on the securities held for SLR. |
| Impact on Lending | Higher CRR reduces funds available for lending. | Higher SLR reduces funds available for lending. |
| Statutory Basis | Section 42(1) of RBI Act, 1934. | Section 24 of Banking Regulation Act, 1949. |
| Current Rate (Dec 2025) | 4.5% (approx.) | 18.0% (approx.) |
Recent Developments
5 developmentsShift to inflation targeting framework and establishment of MPC in 2016.
Use of forward guidance by the RBI to communicate future policy intentions.
Increased focus on liquidity management through various tools to ensure effective policy transmission.
Response to COVID-19 pandemic with significant rate cuts and liquidity injections to support economic activity.
Recent rate hike cycle (2022-2023) to combat elevated inflation, followed by a pause to assess transmission and economic impact.