The Reserve Bank of India uses various monetary policy tools to control inflation, maintain liquidity, regulate credit, and support economic growth. These tools mainly include policy rates and reserve ratios. By increasing or decreasing these rates, the RBI influences the cost and availability of money in the economy.
Policy Rates and Reserve Ratios (April 2025)
| Instrument | Rate |
|---|---|
| Repo Rate | 6.00% |
| Reverse Repo Rate | 3.35% |
| Marginal Standing Facility (MSF) Rate | 6.25% |
| Bank Rate | 6.25% |
| Cash Reserve Ratio (CRR) | 4.00% |
| Statutory Liquidity Ratio (SLR) | 18.00% |
Lending and Deposit Rates
| Rate | Range |
|---|---|
| Base Rate | 8.85% – 10.10% |
| MCLR (Marginal Cost of Funds Based Lending Rate) | 7.95% – 8.35% |
| Savings Deposit Rate | 2.70% – 3.00% |
| Term Deposit Rate (Above 1 Year) | 6.00% – 7.25% |
Repo Rate
The Repo Rate (Repurchase Rate) is the rate at which the RBI lends short-term funds to commercial banks against government securities. It is the most important policy rate and acts as the benchmark interest rate in the economy.
When banks face a shortage of funds, they borrow money from the RBI by pledging government securities as collateral. The bank agrees to repurchase these securities at a later date at a predetermined price, which includes interest.
When the RBI increases the repo rate, borrowing becomes more expensive for banks. Banks, in turn, increase their lending rates, making loans costlier for businesses and individuals. This reduces demand and helps control inflation. Conversely, when the RBI reduces the repo rate, loans become cheaper, encouraging investment and consumption, thereby supporting economic growth.
Reverse Repo Rate
The Reverse Repo Rate is the rate at which commercial banks deposit their surplus funds with the RBI for short periods.
When the RBI increases the reverse repo rate, banks earn a higher return by parking funds with the RBI. As a result, banks lend less money to businesses and consumers, reducing liquidity in the economy. When the reverse repo rate is reduced, banks are encouraged to lend more money, thereby increasing liquidity and economic activity.
Thus, while the repo rate injects liquidity into the banking system, the reverse repo rate absorbs excess liquidity from the system.
Cash Reserve Ratio (CRR)
The Cash Reserve Ratio (CRR) is the percentage of a bank’s Net Demand and Time Liabilities (NDTL) that must be maintained as cash reserves with the RBI.
Banks cannot use this money for lending or investment purposes. The RBI does not pay any interest on CRR balances.
For example, if a bank has deposits of ₹100 crore and the CRR is 4%, it must keep ₹4 crore with the RBI as cash reserves.
An increase in CRR reduces the amount available for lending and decreases liquidity in the economy. A reduction in CRR increases the lending capacity of banks and injects liquidity into the system.
Statutory Liquidity Ratio (SLR)
The Statutory Liquidity Ratio (SLR) is the percentage of a bank’s Net Demand and Time Liabilities that must be maintained in the form of liquid assets such as cash, gold, and approved government securities.
Unlike CRR, these reserves are maintained by banks themselves.
A higher SLR reduces the amount of funds available for lending and acts as an anti-inflationary measure. A lower SLR increases the lending capacity of banks and promotes economic growth.
SLR also ensures that banks maintain sufficient liquid assets to meet depositor demands and financial emergencies.
Bank Rate
The Bank Rate is the rate at which the RBI provides long-term loans and advances to commercial banks without any repurchase agreement.
It is defined under Section 49 of the RBI Act, 1934. Although it is no longer actively used as a primary monetary policy tool, it remains important because several penalty rates and regulatory charges are linked to it.
If banks fail to maintain the prescribed CRR or SLR, penalties are generally calculated with reference to the Bank Rate.
Liquidity Adjustment Facility (LAF)
The Liquidity Adjustment Facility (LAF) was introduced in 2000 to help the RBI manage short-term liquidity conditions in the banking system.
Under LAF, banks can:
- Borrow funds from RBI through Repo operations.
- Park excess funds with RBI through Reverse Repo operations.
The facility enables the RBI to quickly inject or absorb liquidity depending on market conditions and is one of the most important tools of day-to-day monetary management.
Open Market Operations (OMO)
Open Market Operations (OMO) refer to the purchase and sale of government securities by the RBI in the open market.
When the RBI purchases government securities, money flows into the banking system, increasing liquidity. When it sells government securities, money is withdrawn from the banking system, reducing liquidity.
OMOs are widely used to manage liquidity and influence interest rates in the economy.
Marginal Standing Facility (MSF)
The Marginal Standing Facility (MSF) was introduced in 2011 as an emergency borrowing window for scheduled commercial banks.
Under this facility, banks can borrow overnight funds from the RBI even when they have exhausted their normal borrowing limits under the repo mechanism. Banks are allowed to use a portion of their SLR securities for borrowing under MSF.
The MSF rate is generally higher than the repo rate, making it a lender-of-last-resort facility for banks facing temporary liquidity shortages.
Difference Between Repo Rate and Reverse Repo Rate
| Basis | Repo Rate | Reverse Repo Rate |
|---|---|---|
| Meaning | RBI lends money to banks | Banks deposit money with RBI |
| Flow of Funds | RBI → Banks | Banks → RBI |
| Purpose | Increase liquidity | Absorb excess liquidity |
| Impact of Increase | Loans become costly | Banks deposit more funds with RBI |
| Economic Effect | Controls inflation | Reduces money supply |
Difference Between CRR and SLR
| Basis | CRR | SLR |
|---|---|---|
| Maintained With | RBI | Banks themselves |
| Form | Cash only | Cash, Gold and Government Securities |
| Interest Earned | No | Possible on investments |
| Purpose | Liquidity control | Liquidity and solvency maintenance |
| Impact of Increase | Reduces lending capacity | Reduces lending capacity |
Conclusion
Policy rates and reserve ratios are the primary tools used by the RBI to regulate money supply, inflation, credit growth, and financial stability. Instruments such as Repo Rate, Reverse Repo Rate, CRR, SLR, Bank Rate, LAF, OMO, and MSF help the RBI maintain balance between economic growth and price stability. Through these tools, the RBI ensures adequate liquidity in the financial system while keeping inflation and financial risks under control.