Why this matters now
RBI tools are a Prelims staple — what each does, which way it pushes liquidity, and the MPC/inflation-target framework. It also underlies current-affairs questions on rate decisions.
The MPC and inflation targeting
Monetary policy is set by the Monetary Policy Committee (MPC) — a six-member body (three from the RBI including the Governor, three appointed by the government), under the RBI Act framework. India follows flexible inflation targeting: the government sets a CPI inflation target of 4% (±2%), and the MPC adjusts rates to meet it.
Quantitative (general) tools
| Tool | What it is |
|---|---|
| Repo rate | Rate at which the RBI lends to banks (the key policy rate) |
| Reverse repo | Rate at which the RBI borrows from banks (absorbs liquidity) |
| MSF | Marginal Standing Facility — emergency lending above the repo rate |
| CRR | Cash Reserve Ratio — share of deposits banks keep with the RBI (no interest) |
| SLR | Statutory Liquidity Ratio — share of deposits in liquid assets (govt securities, gold) |
| OMO | Open Market Operations — RBI buying/selling government securities |
How it works
To fight inflation, the RBI tightens — raising the repo rate, CRR or SLR — making credit dearer and reducing money supply. To support growth, it eases — cutting rates and reserve ratios — making credit cheaper. Qualitative tools (margin requirements, moral suasion, selective credit control) target specific sectors.
Monetary vs fiscal policy
Monetary policy (RBI: interest rates, money supply) and fiscal policy (government: taxes, spending) are the two arms of macroeconomic management. They work best when coordinated — e.g. both easing to counter a deep slowdown.
UPSC angle
Know each tool and its direction (raise repo/CRR/SLR = tighten = fight inflation). Remember the MPC (6 members) and the 4% ±2% CPI target. Distinguish CRR (with RBI) from SLR (liquid assets).
Frequently asked questions
What is monetary policy?
The RBI’s management of money supply and interest rates to control inflation and support growth.
What is the repo rate?
The rate at which the RBI lends short-term funds to commercial banks; it is the key policy rate that influences all other interest rates.
What is the difference between CRR and SLR?
CRR is the share of deposits banks keep as cash with the RBI; SLR is the share they keep in liquid assets like government securities and gold.
What is the Monetary Policy Committee?
A six-member committee (three RBI, three government-appointed) that sets the policy rate to meet the flexible inflation target of 4% ±2%.