Monetary Policy Tools: A Ready Reckoner Table

Tools & Strategy <2% CPI: Fight Defla on >6% CPI: Fight Infla on

Quan ta ve
Tools

Reserves (CRR,
↓ (Decrease) ↑ (Increase)
SLR)

Key Rates
(Repo, MSF, ↓ (Decrease) ↑ (Increase)
Bank Rate)

Market
OMO: RBI → G-Sec from market. MSS: Not its OMO: RBI ← G-Sec from market. MSS:
Opera ons
objec ve. Same as OMO.
(OMO, MSS)

Qualita ve
Tools

Moral Suasion /
Nudge / Force banks to enforce Dovish Policy. To enforce the Hawkish Policy.
Direct Ac on

↓ Loan-flow to sectors where

↑ e.g., Gold-LTV: 60% → 90%. ↑ Loan-flow
specula ve investment leads to
Margin to sectors that can generate
demand-side infla on.e.g., Real estate
Requirement / employment.e.g., Tex le workers buying
& housing.↓ Loan-flow to sectors
LTV more → ↑ Demand/consump on → Fights
where loans can ↑ supply.e.g., Onion
defla on.
farmers.

Ensure credit flow to priority sectors like Restrict credit to non-priority sectors or
Selec ve Credit agriculture and small-scale industries to specula ve areas like real estate to curb
Control / PSL boost employment and demand, countering infla on and avoid demand-side
defla on. pressure.
Monetary Policy: Quan ta ve Tools

(Also known as General or Indirect Tools)

CRR (Cash Reserve Ra o) SLR (Statutory Liquidity Ra o)

Banks must keep this much deposit in liquid

Banks must keep this much deposit with RBI.
assets (cash, gold, etc.).

RBI doesn’t pay interest on it, except in extraordinary

Associated profit possible.
circumstances (e.g., 1999-2000 banking slowdown).

Banks earn no profit/interest. Banks earn some profit.

Mandated under RBI Act, 1934. Mandated since 1949.

RBI can fix any CRR legally; no minimum/maximum

Legally, SLR cannot exceed 40%.
ceiling exists.

Currently 19.5% of NDTL (Net Demand & Time

Currently 4% of DTL (Demand & Time Liabili es). Liabili es), to be reduced to 18% in a phased
manner.

Counted on Total DTL. Counted on NDTL.

During demone za on, RBI prescribed Incremental Associated with Liquidity Coverage Ra o (LCR)
CRR of 100%. and High-Quality Liquid Assets (HQLA).

Applicable to all Scheduled Commercial Banks (SCB). Similar applica on to SLR.

Key Rates: Infla on and Defla on Control

Rate Details

- Interest rate at which banks borrow long-term loans from RBI without pledging
Bank Rate
any securi es/collaterals.

- RBI now uses Repo Rate for policy purposes to combat infla on/defla on.

- Bank Rate = MSF Rate.

Marginal Standing - Introduced in 2011, allows Scheduled Commercial Banks (SCBs) to borrow
Facility (MSF) short-term loans from RBI by pledging SLR-quota securi es as collateral.

- MSF Rate is higher than Repo Rate.

Liquidity Adjustment
- Introduced in 2000, consists of two mechanisms:
Facility (LAF)

- Interest rate at which RBI lends short-term loans to banks using G-Sec as
1. LAF-Repo Rate
collateral.

- Banks repurchase these G-Secs from RBI at a higher pre-determined price.

- SCBs can’t pledge non-SLR securi es under this mechanism.

- Repo Rate is also called Ready Forward Transac on.

2. LAF-Reverse Repo
- Interest rate at which banks deposit surplus funds with RBI for short periods.
Rate

- Mechanism is similar to Repo, but the client gives G-Sec as collateral to RBI.

- Reverse Repo Rate is lower than Repo Rate.

Key Rates - associated terms

 Policy Corridor: It's the width among MSF-Repo-ReverseRepo. Presently, 25 basis points (0.25%).
Previously it had been 1%, 0.50% but narrowed to 0.25% for be er alignment with call money
market, thus ensuring be er transmission of monetary policy.

 Window Opera ons: LAF-MSF "windows" are operated through RBI's Core Banking Solu on
(CBS) pla orm.

 (Uncollateralized) Standing Deposit Facility (SDF, थायी जमा सुिवधा): Banks park funds in RBI
for short-term to earn interest. No G-sec / collateral, unlike Reverse Repo. This helps RBI absorb
excess liquidity for short term in situa ons like demone za on when RBI may not have enough
G-Secs to pledge as collaterals.
Urjit Patel Commi ee on Monetary policy (2013) proposed this; Budget-2018 agreed to amend
RBI Act for this.

 Tri-Party Repo (ि प ीय रे पो, ऋण-अनुबंध): In ordinary repo, there are two par es—borrower
vs. lender (RBI). In Tri-Party Repo, there are 3 par es:

1. Borrowers

2. Lenders

3. Tri-Party Agent (e.g., NSE) who acts as an intermediary between the two par es to
facilitate collateral custody, payment, and guaranteed se lement.
2017: RBI issued guidelines—2018: Na onal Stock Exchange (NSE) started. This is not a
tool of Monetary Policy. It helps deepening the Corporate Bond market.

BPLR, MCLR, External Benchmarks, Teaser Loans, etc.: Terms related to how individual banks decide
their lending rates. More in NPA-handout in future.

12.1.4 Market Opera ons (OMO, MSS): (Infla on - Sell G-Sec, Defla on - Buy)

 Union & State Govt's securi es to control money supply. RBI buys and sells securi es to control
money supply.
RBI buying = Money supply increases (Liquidity injec on).
RBI selling = Money supply decreases (Liquidity withdrawal).
Here’s a structured table for be er clarity:

Key Rates and Associated Terms

Term Descrip on Current Details (2024)

The difference between the Marginal Standing Currently, 50 basis points wide:
Policy Corridor Facility (MSF) rate and the Standing Deposit SDF (6.25%), Repo (6.50%), MSF
Facility (SDF) rate. (6.75%).

Standing Facility where banks park funds with RBI without Acts as the floor of the LAF
Deposit Facility collateral for liquidity absorp on. corridor.

A borrowing/lending mechanism involving three Facilitates corporate bond market

Tri-Party Repo par es: borrower, lender, and a tri-party agent depth but is not a direct monetary
(e.g., NSE). policy tool.

Buying securi es injects liquidity;

Open Market RBI buys or sells government securi es to control
selling securi es withdraws
Opera ons money supply and liquidity.
liquidity.

Priority Sector Lending (PSL)

Quota
Category Descrip on
(2024)

SC/ST, Women, PH, Minori es, Ar sans, and beneficiaries of

Weaker Sec ons 10%
social schemes.

Agriculture All farmers (small and big). 18%

Small/Marginal Farmers Marginal farmers (up to 1 ha) and small farmers (>1 to 2 ha). 10%

Micro Enterprises Small-scale industries like Khadi and village industries. 7.5%

Renewable Energy Loans for renewable energy projects, such as windmills,

4.5%
Projects biomass, and solar.
Revised PSL Norms

Bank Type Requirement Details

Regional Rural Must meet a pure PSL quota of 75% of Adjusted Net Includes addi onal quotas in
Banks (RRBs) Bank Credit (ANBC). specific PSL categories.

Urban Coopera ve Gradual increase in PSL quota to 75% of ANBC by FY Designed to enhance PSL in
Banks (UCBs) 2025-26. underserved areas.

Required to allocate 40% of ANBC to PSL, with no

Foreign Banks (<20 Applicable from March 31,
internal loan quotas for weaker sec ons or small
branches) 2024.
farmers.

Priority Sector Lending Cer ficates (PSLCs)

Type of Cer ficate Descrip on

PSLC-A Agriculture-related loans.

PSLC-SM Loans for Small and Marginal Farmers.

PSLC-ME Loans for Micro Enterprises.

PSLC-G General PSL loans.

Repo Rate and Infla on Targe ng Framework

Aspect Descrip on Details (2024)

Repo Rate Determined by majority vote of the

Governor holds a cas ng vote in case of a e.
Decision Monetary Policy Commi ee (MPC).

The MPC must publish the minutes of

Transparency Minutes are released within 14 days of the
its mee ngs and a Monetary Policy
Measures mee ng for accountability.
Report every six months.

Decided by the Government of India in Current target: 4% ± 2% (range of 2-6%),

Infla on Target
consulta on with the RBI Governor. renewed ll March 31, 2026.

Defined as infla on not remaining In such a case, the MPC must submit a report
Failure of Target within the 2-6% band for three to the Government explaining the reasons
consecu ve quarters. and proposing remedies.
RBI Monetary Policy and Priority Sector Lending (PSL)

Aspect Details

Repo Rate 6.50% (rate at which RBI lends to banks).

Standing Deposit Facility (SDF) 6.25% (rate for banks to park surplus funds with RBI).

Marginal Standing Facility

6.75% (rate for overnight borrowing from RBI).
(MSF)

4.00% (percentage of total deposits to be maintained as reserves with

Cash Reserve Ra o (CRR)
RBI).

Priority Sector Lending (PSL) Norms

Bank Type PSL Target Details

Scheduled Commercial Banks

40% of ANBC Includes foreign banks with ≥20 branches.
(SCBs)

Focus on agriculture and rural

Regional Rural Banks (RRBs) 75% of ANBC
development.

Targets underserved sectors for financial

Small Finance Banks (SFBs) 75% of ANBC
inclusion.

Urban Coopera ve Banks 65% (FY 2024-25), 75% (FY

Gradual increase to enhance credit flow.
(UCBs) 2025-26)
PSL District Incen ves

District Category Per Capita PSL Weight for Incremental PSL

Low Credit Flow Districts < ₹9,000 125% (higher weight to boost credit flow).

High Credit Flow Districts > ₹42,000 90% (lower weight to moderate credit flow).

Infla on Target (Monetary Policy Framework)

Aspect Details

CPI Infla on Target 4% ± 2% (range: 2%-6%).

Monitoring Period Reviewed every 6 months.

Failure Condi on Infla on outside the 2%-6% range for 3 consecu ve quarters.