RBI's Monetary Policy: Repo, CRR, SLR, and What Actually Moves Inflation

In June 2022, the RBI held an emergency off-cycle Monetary Policy Committee meeting and raised the repo rate by 40 basis points. It was the first off-cycle rate action since 2020's COVID cut. The trigger: inflation at 7.8%, well above the upper tolerance band of 6%. Over the next 18 months, the MPC raised the repo rate 250 basis points — from 4% to 6.5%. Understanding why these decisions were made, what instruments were used, and how they affect you is the core of monetary policy for UPSC.

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[TOPIC CLASSIFICATION]

Topic type: Monetary Economics / RBI / Economy PYQ frequency: Very High. Every year in Prelims; Mains GS 3 standard topic. Exam stage relevance: Prelims + Mains Primary GS Paper: GS 3 (Indian Economy)

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[EXAMINER REASONING]

1. Trap: Confusing what repo and reverse repo are from the bank's perspective. Repo = RBI lends to banks (banks REPO their securities). Reverse Repo = RBI borrows from banks (banks park excess funds with RBI). Repo rate is higher; reverse repo rate is lower.

2. Most confused: CRR vs SLR. Both are reserve requirements. CRR must be kept with RBI in cash. SLR must be maintained in liquid assets (government securities, gold, cash). CRR earns no interest; SLR assets earn interest.

3. Key anchor: The inflation targeting framework (amended RBI Act, 2016). 4% target ±2% band (2–6%). If CPI inflation exceeds 6% for three consecutive quarters, RBI must explain to government in writing. This framework formalised MPC's mandate.

4. Current affairs hook: In FY 2023–24, after 250bps of rate hikes, the MPC paused rates at 6.5% for 6+ meetings. By 2024–25, inflation fell below 4%, and the MPC began cutting rates. The monetary policy stance shifted from 'withdrawal of accommodation' to 'neutral'.

5. Mains hinge: "India's inflation targeting framework has improved monetary policy credibility but constrained RBI's developmental role." Evaluate.

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Core Concept

The Liquidity Adjustment Facility (LAF) — the corridor

The RBI manages short-term liquidity through a corridor:

• Repo Rate: RBI lends overnight to banks against government securities. Banks pay repo rate. Currently 6.5% (as of mid-2024). This is the policy rate — the primary signal.
• Reverse Repo Rate: RBI borrows overnight from banks (banks park surplus). Banks receive reverse repo rate. Typically 35 bps below repo = Standing Deposit Facility (SDF) replaced the fixed-rate reverse repo in 2022.
• Marginal Standing Facility (MSF): Emergency window — banks borrow from RBI at MSF rate (repo + 25 bps). Borrowing against SLR securities (even below minimum SLR requirement).