RBI Monetary Policy Tools Explained: Repo, Reverse Repo, CRR, SLR, MSF and SDF
How the Reserve Bank of India uses repo, reverse repo, SDF, MSF, CRR, SLR and open market operations, and what the Monetary Policy Committee decides.
Banking exams and UPSC economy questions treat RBI tools as a matching exercise: which rate is a floor, which is a ceiling, and which ratio locks up deposits. The numbers themselves change every policy meeting. Learn the job of each tool, then check the latest rates on the RBI website before an exam.
The policy corridor
The repo rate is the rate at which the RBI lends short-term money to commercial banks against government securities. A higher repo rate makes borrowing costlier and is used when the RBI wants to cool demand. The reverse repo rate is the rate at which the RBI borrows from banks. It used to be the floor of the corridor.
The standing deposit facility (SDF) is now the floor. Banks can park surplus funds with the RBI overnight without offering collateral. The marginal standing facility (MSF) is the ceiling. Banks can borrow overnight from the RBI a little above the repo rate, even if they dip into their statutory liquidity ratio. The Monetary Policy Committee, set up under the RBI Act as amended in 2016, decides the policy repo rate. It has six members: three from the RBI, including the Governor as chair, and three appointed by the Central Government.
| Tool | Direction of money | Exam point |
|---|---|---|
| Repo | RBI lends to banks | Policy rate set by the MPC |
| SDF | Banks park funds at the RBI | Floor of the corridor; no collateral |
| MSF | Banks borrow from the RBI | Ceiling of the corridor |
| CRR | Share of deposits kept with the RBI as cash | No interest; a liquidity lock |
| SLR | Share of deposits kept in liquid assets | Cash, gold, or approved securities |
| OMO | RBI buys or sells government securities | Buying injects money; selling absorbs it |
A small liquidity example
Suppose a bank has deposits of ₹1,000 crore, CRR is 4 percent and SLR is 18 percent. It must keep ₹40 crore with the RBI as cash and ₹180 crore in SLR assets. Those amounts cannot be lent freely. If the RBI raises CRR, lendable funds fall even before the repo rate changes. If the RBI buys bonds in the market, it pays banks and liquidity rises. Current percentages are a current-affairs fact. Confirm them against the latest RBI notification.
Practice MCQs
1. The rate at which the RBI lends to commercial banks is the: (a) reverse repo (b) repo (c) bank rate only (d) CRR
Answer: (b). Repo is RBI lending to banks.
2. The standing deposit facility is best described as: (a) the ceiling (b) the floor, without collateral (c) a tax (d) a type of bank
Answer: (b).
3. CRR balances are kept: (a) with the RBI as cash (b) only in gold (c) with SEBI (d) as loans to the public
Answer: (a).
4. When the RBI sells government securities in the open market, liquidity: (a) rises (b) falls (c) is unchanged (d) moves to SEBI
Answer: (b). Banks pay the RBI, so money leaves the banking system.
5. The Monetary Policy Committee has: (a) 3 members (b) 5 members (c) 6 members (d) 12 members
Answer: (c). Three from the RBI and three appointed by the government.
6. MSF allows a bank to borrow: (a) below the SDF (b) at the ceiling of the corridor (c) without any rate (d) only for ten years
Answer: (b).
Practice a quiz
The free practice set on the homepage needs no account. Use it after you read, while the facts are still fresh.
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