How the RBI's Monetary Policy Committee manages inflation and liquidity using a defined set of rate and reserve tools.
The Monetary Policy Committee (MPC), a 6-member body (3 from RBI including the Governor, 3 external experts) set up under the RBI Act (amended 2016), sets the policy repo rate with a mandate to keep CPI inflation at 4% (+/- 2%), reviewing policy roughly every two months.
Repo rate: rate at which RBI lends short-term funds to banks against securities. Reverse repo rate: rate at which RBI borrows from banks (absorbs liquidity). SDF (Standing Deposit Facility): a newer, collateral-free tool for absorbing excess liquidity, replacing reverse repo as the main liquidity-absorption floor since 2022. MSF (Marginal Standing Facility): emergency overnight borrowing window for banks, priced above the repo rate. CRR (Cash Reserve Ratio): the % of deposits banks must keep with RBI, un-invested. SLR (Statutory Liquidity Ratio): the % of deposits banks must hold in approved liquid assets (cash, gold, government securities).
APPSC tests which instrument tightens vs eases liquidity (raising CRR/SLR/repo tightens; cutting them eases), and the MPC's composition and inflation target — directly linked to the Banking Sector Reforms & NPAs and Union Budget pages on this site.
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