Monetary Policy & RBI Tools
Economy Advanced · मौद्रिक नीति और RBI साधन
📋Quick Overview
The Reserve Bank of India (RBI) is India's central bank, established in 1935. It regulates the money supply, sets interest rates, and maintains financial stability. The Monetary Policy Committee (MPC), formed in 2016, is responsible for setting the benchmark interest rate (Repo Rate) to achieve the inflation target of 4% (±2%). Key tools include Repo Rate, CRR, SLR, and MSF.
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RBI was established on April 1, 1935 (Hilton Young Commission recommendation) and nationalized in 1949. Its HQ was moved from Calcutta to Mumbai (Bombay) in 1937. The Governor is the head — currently Sanjay Malhotra (from Dec 2024).
📖RBI's Monetary Policy Tools
| Tool | Definition | Current Rate | Effect |
|---|---|---|---|
| Repo Rate | Rate at which RBI lends short-term money to commercial banks | ~6.25% (2025) | Higher repo → expensive loans → less borrowing → reduces inflation |
| Reverse Repo Rate | Rate at which RBI borrows from commercial banks (absorbs excess liquidity) | Repo - 25bps (~6.0%) | Higher reverse repo → banks park more with RBI → reduces money supply |
| CRR (Cash Reserve Ratio) | % of deposits banks MUST keep with RBI as cash (earns no interest) | 4% | Higher CRR → less money to lend → reduces inflation; Lower CRR → more lending |
| SLR (Statutory Liquidity Ratio) | % of deposits banks must maintain in liquid assets (gold + govt. securities) | 18% | Higher SLR → less loanable funds; ensures banks remain solvent |
| MSF (Marginal Standing Facility) | Emergency overnight borrowing facility for banks from RBI (above Repo Rate) | Repo + 25bps | Safety valve for banks facing acute liquidity shortfall |
| Bank Rate | Long-term rate at which RBI discounts bills; penal rate for CRR/SLR shortfall | Repo + 25bps | Historical rate; now linked to MSF; punitive for deficit banks |
📖Monetary Policy Committee (MPC)
- •MPC formation: Amendment to RBI Act 1934 in 2016; 6-member committee; 3 from RBI + 3 from Government; Governor chairs; majority decision; Governor has casting vote in case of tie
- •Inflation Target: 4% CPI with ±2% band (2-6% acceptable); if inflation outside band for 3 consecutive quarters → MPC must explain to Parliament why target missed
- •MPC meetings: 6 meetings per year (bi-monthly); decisions published after each meeting; minutes released 14 days after meeting