{"id":339840,"date":"2025-06-09T16:13:15","date_gmt":"2025-06-09T10:43:15","guid":{"rendered":"https:\/\/forumias.com\/blog\/?p=339840"},"modified":"2025-06-15T18:27:30","modified_gmt":"2025-06-15T12:57:30","slug":"rbis-monetary-policy-instruments","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/rbis-monetary-policy-instruments\/","title":{"rendered":"RBI\u2019s Monetary Policy Instruments"},"content":{"rendered":"<p><strong>News:<\/strong> RBI has slashed the repo rate by a larger-than-expected 50 basis points to 5.50 per cent, marking the third consecutive reduction since February 2025. <strong>RBI\u2019s Monetary Policy Instruments.<\/strong><\/p>\n<h2>About RBI\u2019s Monetary Policy Instruments and key takeaways from the latest monetary policy<\/h2>\n<figure id=\"attachment_339842\" aria-describedby=\"caption-attachment-339842\" style=\"width: 430px\" class=\"wp-caption aligncenter\"><img data-recalc-dims=\"1\" loading=\"lazy\" decoding=\"async\" class=\" wp-image-339842\" src=\"https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2025\/06\/Source-RBI.png?resize=430%2C265&#038;ssl=1\" alt=\"\" width=\"430\" height=\"265\" srcset=\"https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2025\/06\/Source-RBI.png?resize=300%2C185&amp;ssl=1 300w, https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2025\/06\/Source-RBI.png?resize=1024%2C631&amp;ssl=1 1024w, https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2025\/06\/Source-RBI.png?resize=768%2C474&amp;ssl=1 768w, https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2025\/06\/Source-RBI.png?w=1411&amp;ssl=1 1411w\" sizes=\"auto, (max-width: 430px) 100vw, 430px\" \/><figcaption id=\"caption-attachment-339842\" class=\"wp-caption-text\">Source &#8211; RBI<\/figcaption><\/figure>\n<h2>Monetary Policy Instruments<\/h2>\n<ul>\n<li><strong>Repo Rate and Reverse Repo Rate:<\/strong> The interest rate that the RBI charges when commercial banks borrow money from it is called the <strong>repo rate<\/strong>.\n<ul>\n<li>The interest rate the central bank pays commercial banks when they park their excess cash is called the <strong>reverse repo rate<\/strong>.<\/li>\n<\/ul>\n<\/li>\n<li><strong>Standing Deposit Facility (SDF) Rate:<\/strong> It is the rate at which the RBI, on an <strong>overnight<\/strong> basis, <strong>accepts uncollateralised deposits from all liquidity adjustment facility (LAF) participants<\/strong>.\n<ul>\n<li>The SDF is also a <strong>financial stability tool<\/strong> in addition to its role in <strong>liquidity management<\/strong>.<\/li>\n<li>It was introduced in <strong>2022<\/strong> to replace the <strong>fixed rate reverse repo (FRRR)<\/strong> as the floor of the liquidity adjustment facility corridor.<\/li>\n<\/ul>\n<\/li>\n<li><strong>Marginal Standing Facility (MSF) Rate:<\/strong> It is the <strong>rate at which a bank can borrow<\/strong>, on an <strong>overnight basis<\/strong>, from the <strong>RBI<\/strong> in an <strong>emergency situation<\/strong> when inter-bank liquidity dries up completely.\n<ul>\n<li>It is typically placed at <strong>25 basis points above the policy repo rate.<\/strong><\/li>\n<\/ul>\n<\/li>\n<li><strong>Liquidity Adjustment Facility (LAF):<\/strong> LAF is a <strong>facility extended by RBI to the scheduled commercial banks<\/strong> (<strong>excluding<\/strong> Regional Rural Banks) and Primary Dealers to avail of liquidity in case of requirement or park excess funds with RBI in case of excess <strong>liquidity on an overnight<\/strong> basis <strong>against the collateral of G-Secs<\/strong> including State Development Loans (SDLs).<\/li>\n<li><strong>Main Liquidity Management Tool:<\/strong> To manage the <strong>frictional liquidity requirements<\/strong>, a <strong>14-day term repo\/reverse repo auction operation<\/strong> at a variable rate is conducted to coincide with the cash reserve ratio (CRR) maintenance cycle.<\/li>\n<li><strong>Bank Rate:<\/strong> In case of <strong>shortfalls<\/strong> in meeting the reserve requirements (cash reserve ratio and statutory liquidity ratio) by the banks, the Reserve Bank <strong>provides to buy or rediscount bills of exchange or other commercial papers at a rate which is called Bank rate.<\/strong><\/li>\n<li><strong>Cash Reserve Ratio (CRR):<\/strong> It is the <strong>percentage of a bank\u2019s net demand and time liabilities (NDTL)<\/strong> that is required to be <strong>maintained in liquid cash with the RBI as a reserve<\/strong>.\n<ul>\n<li>The RBI determines the CRR percentage from time to time.<\/li>\n<\/ul>\n<\/li>\n<li><strong>Statutory Liquidity Ratio (SLR):<\/strong> Every bank is required to maintain in <strong>Indian assets<\/strong>, the value of which shall <strong>not be less than such percentage of the total of its demand and time liabilities<\/strong> in India as on the last Friday of the second preceding fortnight, in the form of <strong>liquid cash, gold, government and state government securities.<\/strong><\/li>\n<li><strong>Open Market Operations (OMOs):<\/strong> These include outright <strong>purchase or sale of government securities by the Reserve Bank<\/strong> for injection or absorption of durable liquidity in the banking system.<\/li>\n<\/ul>\n<h2>Recent Decisions by the RBI Monetray Policy Committee<\/h2>\n<ul>\n<li>The Reserve Bank of India\u2019s six-member Monetary Policy Committee (MPC) has <strong>slashed the repo rate by a bigger-than-expected 50 basis points to 5.50 per cent<\/strong>, marking the third consecutive reduction since February 2025.<\/li>\n<li>The central bank <strong>also cut the cash reserve ratio<\/strong> of banks <strong>by 100 basis points to 3 per cent<\/strong>, releasing <strong>Rs 2.5 lakh crore of lendable resources<\/strong> to the banking system.<\/li>\n<\/ul>\n<h2>Impacts of Monetary Policy Instruments by the RBI<\/h2>\n<ul>\n<li><strong>Impact of reducing repo rate:<\/strong> When the RBI <strong>wants to encourage economic activity<\/strong> in the economy, it reduces the repo rate.\n<ul>\n<li>Doing this enables commercial banks to bring down the interest rates they charge (on their loans) as well as the interest rate they pay on deposits, incentivising people to spend money, and businesses to take new loans a little less cost.<\/li>\n<\/ul>\n<\/li>\n<li><strong>Impact of increasing repo rate:<\/strong> When the RBI <strong>wants to control inflation<\/strong>, it increases the repo rate.\n<ul>\n<li>Banks thus have to pay <strong>more interest to borrow<\/strong> from the RBI, which means they will charge more interest to their borrowers, disincentivising people from borrowing money.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>News: RBI has slashed the repo rate by a larger-than-expected 50 basis points to 5.50 per cent, marking the third consecutive reduction since February 2025. RBI\u2019s Monetary Policy Instruments. About RBI\u2019s Monetary Policy Instruments and key takeaways from the latest monetary policy Monetary Policy Instruments Repo Rate and Reverse Repo Rate: The interest rate that&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/rbis-monetary-policy-instruments\/\">Continue reading <span class=\"screen-reader-text\">RBI\u2019s Monetary Policy Instruments<\/span><\/a><\/p>\n","protected":false},"author":10393,"featured_media":339842,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1566,3127,12039],"tags":[11872],"class_list":["post-339840","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-daily-factly-articles","category-economy","category-knolls","tag-9pm-daily-factly","entry"],"jetpack_featured_media_url":"https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2025\/06\/Source-RBI.png?fit=1411%2C870&ssl=1","views":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/339840","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10393"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=339840"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/339840\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media\/339842"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=339840"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=339840"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=339840"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}