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Monetary Policy Tools

Banking / Economy Awareness · Banking System & RBI

Overview

The RBI controls liquidity and interest rates through policy rates and reserve requirements decided within an inflation-targeting framework.

Key points

The MPC has six members (three from RBI including the Governor, three external); the Governor has the casting vote.
Inflation target: CPI 4% with a tolerance band of ±2%.
Repo rate: rate at which the RBI lends to banks against securities; the main policy rate.
Standing Deposit Facility (SDF) is the floor and Marginal Standing Facility (MSF) the ceiling of the liquidity corridor.
CRR: share of net demand and time liabilities kept with the RBI (earns no interest); SLR: liquid assets (cash, gold, government securities) kept by the bank itself.

Explanation

Open market operations: buying government securities injects liquidity; selling absorbs it.
Bank rate is a long-term lending rate; it is aligned with MSF.
Raising repo or CRR tightens money supply (anti-inflation); lowering them eases it.
Current values of these rates change — take them from the latest RBI policy statement.

Step by step

Identify the institution, rule or instrument asked.
Recall its definition, year, limit or function from a table.
Eliminate options from similar institutions or older rules.

Examples

To control inflation, the RBI is likely to → raise the repo rate.
Cash kept by banks with the RBI as a share of NDTL → CRR.
Number of MPC members → six.

Traps and advanced points

Trap: Mixing CRR and SLR.
Trap: Thinking reverse repo is the floor (SDF is the floor now).
Trap: Memorising old rate values as current.

Quick revision

MPC 6; CPI 4% ± 2%.
SDF floor, MSF ceiling.
CRR with RBI; SLR with bank.

Practice MCQs

Which term-description pair is correctly matched for the concept “EBLR”?
1. current account — External Benchmark Linked Rate
2. GDP — External Benchmark Linked Rate
3. EBLR — Gross Domestic Product
4. EBLR — External Benchmark Linked Rate
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Answer: (d) EBLR — External Benchmark Linked Rate. Loan pricing linked to an external benchmark for applicable categories.
Which banking/finance term is best described as: Cash Reserve Ratio?
1. EXIM Bank
2. CRR
3. demand deposit
4. bank rate
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Answer: (b) CRR. Share of bank NDTL maintained as cash balance with RBI, as prescribed.
Which term-description pair is correctly matched for the concept “repo rate”?
1. repo rate — Anti-Money Laundering
2. repo rate — rate at which RBI lends short-term funds against eligible collateral under the liquidity framework
3. RTGS — rate at which RBI lends short-term funds against eligible collateral under the liquidity framework
4. IFSC — rate at which RBI lends short-term funds against eligible collateral under the liquidity framework
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Answer: (b) repo rate — rate at which RBI lends short-term funds against eligible collateral under the liquidity framework. A policy-rate concept used to influence liquidity and interest-rate conditions.
Which banking/finance term is best described as: Statutory Liquidity Ratio?
1. demat account
2. inflation
3. SLR
4. credit risk
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Answer: (c) SLR. Required share of NDTL maintained in specified liquid assets under applicable rules.
In banking/finance, what does “MCLR” refer to most accurately?
1. Marginal Cost of Funds based Lending Rate
2. access to useful and affordable formal financial services
3. directed lending framework for specified sectors/categories
4. Pension Fund Regulatory and Development Authority
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Answer: (a) Marginal Cost of Funds based Lending Rate. Internal benchmark framework used by banks for specified floating-rate loans.
In banking/finance, what does “repo rate” refer to most accurately?
1. Export-Import Bank of India
2. External Benchmark Linked Rate
3. Real Time Gross Settlement
4. rate at which RBI lends short-term funds against eligible collateral under the liquidity framework
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Answer: (d) rate at which RBI lends short-term funds against eligible collateral under the liquidity framework. The correct answer is “rate at which RBI lends short-term funds against eligible collateral under the liquidity framework”. A policy-rate concept used to influence liquidity and interest-rate conditions.
Which banking/finance term is best described as: mechanisms used to absorb surplus liquidity from the banking system?
1. reverse repo / liquidity absorption operations
2. SLR
3. NPCI
4. endorsement
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Answer: (a) reverse repo / liquidity absorption operations. Reverse repo / liquidity absorption operations — mechanisms used to absorb surplus liquidity from the banking system. Operational frameworks can evolve; learn the current RBI liquidity framework near the exam.
Which banking/finance term is best described as: rate at which RBI lends short-term funds against eligible collateral under the liquidity framework?
1. repo rate
2. EXIM Bank
3. NABARD
4. financial inclusion
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Answer: (a) repo rate. Repo rate — rate at which RBI lends short-term funds against eligible collateral under the liquidity framework. A policy-rate concept used to influence liquidity and interest-rate conditions.
In banking/finance, what does “bank rate” refer to most accurately?
1. Insurance Regulatory and Development Authority of India
2. a rate associated with RBI lending/rediscounting framework
3. P×R×T/100
4. signing/instruction used to transfer or negotiate an instrument where legally applicable
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Answer: (b) a rate associated with RBI lending/rediscounting framework. The correct answer is “a rate associated with RBI lending/rediscounting framework”. Distinguish it from the policy repo rate.