Monetary Policy in India:

Monetary Policy in India:

• Under the Reserve Bank of India, Act,1934 , RBI is entrusted 

with the responsibility of conducting monetary policy in India.

• Objective: To maintain price stability while keeping in mind 

the objective of growth.

• The Monetary Policy Framework: In May 2016, the RBI Act, 

1934 was amended to provide a statutory basis for the 

implementation of the flexible inflation targeting framework. The operating framework of monetary policy aims at 

aligning the operating target – the weighted average call 

rate (WACR) – with the policy repo rate.

 It is through proactive liquidity management to facilitate 

transmission of repo rate changes through the entire 

financial system, which, in turn, influences aggregate 

demand – a key determinant of inflation and growth.

• Inflation Target: The Central Government, in consultation 

with the RBI, determines the inflation target in terms of the 

Consumer Price Index (CPI) once in five years.

 Accordingly, the Central Government notified 4 percent 

CPI inflation as the target with the upper tolerance limit of 6 

percent and the lower tolerance limit of 2 percent.

 The same inflation target has been retained for the 5-year 

period – April 1, 2021 to March 31, 2026.

Instruments of Monetary Policy:

• Repo Rate: The interest rate at which the Reserve Bank provides 

liquidity under the Liquidity Adjustment Facility (LAF) against 

the collateral of government and other approved securities.

• Reverse Repo Rate: The interest rate at which the Reserve 

Bank absorbs liquidity from banks against the collateral of 

eligible government securities under the LAF.

• Standing Deposit Facility (SDF) Rate: The rate at which the 

Reserve Bank accepts non collateralized deposits, on an 

overnight basis.

 The SDF rate is placed at 25 basis points below the policy 

repo rate.

 With introduction of SDF in April 2022, the SDF rate 

replaced the fixed reverse repo rate as the floor of the 

liquidity corridor.

• Marginal Standing Facility (MSF) Rate: The penal rate at which

banks can borrow, on an overnight basis, from the Reserve 

Bank by dipping into their Statutory Liquidity Ratio (SLR) 

portfolio up to a predefined limit (2 percent). 

 This provides a safety valve against unanticipated liquidity 

shocks to the banking system.

 The MSF rate is placed at 25 basis points above the policy 

repo rate.

• Liquidity Adjustment Facility (LAF): The LAF refers to the 

Reserve Bank’s operations through which it injects/absorbs 

liquidity into/from the banking system. 

 It consists of overnight as well as term repo/reverse repos 

(fixed as well as variable rates), SDF and MSF.

• Cash Reserve Ratio (CRR): The average daily balance that 

a bank is required to maintain with the Reserve Bank as a 

percent of its net demand and time liabilities (NDTL).

• Statutory Liquidity Ratio (SLR): Every bank shall maintain 

in India assets, typically in unencumbered government 

securities, cash and gold.

• Open Market Operations (OMOs): These include outright 

purchase/sale of government securities by the Reserve Bank 

for injection/absorption of durable liquidity in the banking 

system.