1. RBI Functions and Monetary Policy Tools
The Reserve Bank of India (RBI), headquartered in Mumbai, is India's central bank. It controls the supply and cost of money using a set of tools. Bank exams ask what each tool means and which way it moves when the RBI wants to control inflation.
Functions of the RBI
- Issuer of currency notes (one-rupee notes and all coins are issued by the Government of India, but distributed through the RBI).
- Banker to the Government: it manages the accounts and borrowing of the Centre and the states.
- Banker's bank and lender of last resort: banks keep reserves with the RBI and can borrow from it in an emergency.
- Regulator and supervisor of banks and NBFCs, custodian of foreign exchange reserves, and manager of the Foreign Exchange Management Act (FEMA).
- Runs and oversees payment systems such as NEFT and RTGS.
Policy rates explained
- Repo rate: the rate at which the RBI lends short-term money to banks against government securities. It is the main policy rate, set by the Monetary Policy Committee.
- Standing Deposit Facility (SDF): introduced in April 2022, it lets banks park extra money with the RBI without giving collateral. It is the floor of the interest-rate corridor and is kept 0.25% below the repo rate.
- Reverse repo: the rate at which the RBI borrows from banks against securities. Since the SDF came in, the fixed reverse repo rate (3.35%) is no longer the floor and is rarely used.
- Marginal Standing Facility (MSF): emergency overnight borrowing by banks, 0.25% above the repo rate; it is the ceiling of the corridor. The Bank Rate is kept equal to the MSF rate.
- As of the policy of 7 October 2026, the RBI raised the repo rate by 0.25% to 5.50%, making SDF 5.25% and MSF and Bank Rate 5.75%. Always check the latest policy before your exam.
Reserve ratios and other tools
- Cash Reserve Ratio (CRR): the share of a bank's deposits (net demand and time liabilities, NDTL) that must be kept as cash with the RBI. Banks earn no interest on it. CRR was cut in four steps (September-November 2025) to 3%.
- Statutory Liquidity Ratio (SLR): the share of NDTL that banks must hold themselves in safe liquid assets such as cash, gold or government securities. It is 18%.
- Open Market Operations (OMO): the RBI buys government securities to put money into the system, or sells them to take money out.
- Qualitative tools: margin requirements on loans, selective credit control and moral suasion (persuading banks).
- To fight inflation the RBI raises the repo rate or CRR and sells securities; to boost growth it does the opposite.
Quick facts
- Repo rate (7 Oct 2026)
- 5.50%
- SDF
- Repo - 0.25% (floor)
- MSF / Bank Rate
- Repo + 0.25% (ceiling)
- Fixed reverse repo
- 3.35%
- CRR
- 3% (since late Nov 2025)
- SLR
- 18%
- SDF introduced
- April 2022
- Kept with RBI
- CRR
- Kept by the bank itself
- SLR
- OMO purchase
- Adds money to the system
💡 Picture a corridor: SDF is the floor, MSF is the ceiling and repo sits in the middle, 0.25% away from each. If you know the repo rate, you can work out the other two.
📝 5-question quiz on this lesson: enrol free to take it and track your score.
