Monetary Policy & RBI Tools
Economy Advanced · मौद्रिक नीति और RBI साधन · 18 facts
RBI (Reserve Bank of India): Established April 1, 1935 (based on Hilton Young Commission report); nationalized January 1, 1949; HQ Mumbai.
RBI Governor is appointed for a 3-year term by the Government of India; can be extended; reports to Union Finance Ministry.
MPC (Monetary Policy Committee): 6 members — 3 from RBI (Governor chairs, Deputy Governor, one official) + 3 external members appointed by Government.
Inflation Target: RBI's MPC targets 4% CPI inflation ±2% (i.e., 2% to 6% band); failure to maintain for 3 consecutive quarters requires written explanation to government.
Repo Rate: Rate at which RBI lends short-term funds to commercial banks; primary monetary policy tool; increase reduces money supply.
Reverse Repo Rate: Rate at which RBI borrows funds from commercial banks; lower than repo rate; absorbs excess liquidity from banking system.
CRR (Cash Reserve Ratio): Percentage of bank deposits that banks must keep as cash with RBI (currently 4%); no interest paid on CRR.
SLR (Statutory Liquidity Ratio): Percentage of deposits banks must maintain in liquid assets — gold, cash, or government securities (currently 18%).
MSF (Marginal Standing Facility): Emergency lending facility; banks can borrow up to 2% of their NDTL from RBI at a rate slightly higher than repo.
MCLR (Marginal Cost of Funds Based Lending Rate): Minimum interest rate banks can charge on loans (since April 2016); replaced base rate system.
Bank Rate: Long-term lending rate of RBI; currently aligned with MSF rate; used for calculation of penalty on CRR/SLR shortfall.
OMO (Open Market Operations): RBI buys/sells government securities to manage liquidity; buying injects liquidity, selling absorbs it.
LAF (Liquidity Adjustment Facility): Mechanism through which RBI manages short-term liquidity; includes repo and reverse repo operations.
Quantitative vs Qualitative tools: Quantitative (repo, CRR, SLR, OMO) affect overall credit; Qualitative (margin requirements, selective credit controls) target specific sectors.
Monetary Policy Report: RBI publishes bi-annually; explains MPC's assessment of inflation and growth; accountability mechanism.
Inflation targeting: Formally adopted by India in 2016 (RBI Act amended); RBI Act Section 45ZA — government sets inflation target in consultation with RBI.
RBI functions: Monetary authority, banker to government, banker's bank, regulator of banks and NBFCs, manager of forex reserves, currency issuer.
India's forex reserves (2024): Approximately $670 billion; 4th largest in the world; managed by RBI; includes foreign currency assets, gold, SDRs.