Corporate and Economic Laws · Laws and Regulations related to Banking Sector

Monetary Policy and Credit Control Powers of RBI

Updated 11 October 2026 · Fact-checked

Monetary policy is the RBI's use of the policy rate, reserve requirements (CRR, SLR), repo and reverse repo operations, and directions to regulate money supply and credit. Under section 45ZB of the RBI Act, 1934, the Monetary Policy Committee sets the policy rate to meet the inflation target. Its decision binds the RBI.

Understand Monetary Policy and Credit Control Powers of RBI

The RBI controls how much money and credit flows in the economy. When inflation is high, it makes money costlier or scarcer. When growth needs support, it makes money cheaper. The tools fall into three groups.

Rate tools. The policy rate is the rate at which the RBI lends to banks. A repo is borrowing funds by selling securities with an agreement to repurchase them on a future date at an agreed price that includes interest. A reverse repo is the opposite: lending funds by purchasing securities with an agreement to resell them later. So in a repo the RBI lends to the bank. In a reverse repo the RBI absorbs money from the bank. Section 45U of the RBI Act defines both, and also defines money market instruments such as call money, term money, certificates of deposit and commercial paper (original maturity up to one year).

Reserve tools. The CRR (Cash Reserve Ratio) is the share of a bank's deposits (net demand and time liabilities) kept as cash with the RBI. The SLR (Statutory Liquidity Ratio) is the share the bank must hold with itself in liquid assets such as cash, gold and approved securities. Raising either leaves banks with less to lend. The CRR and SLR percentages are prescribed under the RBI Act and the Banking Regulation Act, so do not memorise a current figure for the exam. Learn the direction of effect.

Institution and direction tools. Section 45ZB lets the Central Government constitute the Monetary Policy Committee (MPC) by notification in the Official Gazette. It has six members: the Governor (Chairperson, ex officio), the Deputy Governor in charge of Monetary Policy (ex officio), one RBI officer nominated by the Central Board (ex officio), and three persons appointed by the Central Government. The MPC determines the Policy Rate required to achieve the inflation target, and its decision is binding on the RBI.

The RBI also gives directions. Under section 45JA it can determine policy and give directions to NBFCs on income recognition, accounting standards, provisioning for bad and doubtful debts, capital adequacy and deployment of funds. Under section 12 of the SARFAESI Act, 2002 it can do the same for asset reconstruction companies. Under section 58 of the RBI Act the Central Board makes regulations, with the previous sanction of the Central Government, including on the relations of scheduled banks with the RBI and the returns they submit.

Key rules to remember

MPC composition (section 45ZB(2)): Governor (Chair) + Deputy Governor (Monetary Policy) + 1 RBI officer + 3 Central Government appointees = 6 members; The first three are ex officio members. The three outside members are appointed by the Central Government.
MPC function and effect (section 45ZB(3) and (4)): MPC determines the Policy Rate to achieve the inflation target; its decision binds the RBI; The Central Government constitutes the MPC by Gazette notification.
Repo: Repo = borrowing funds by selling securities with an agreement to repurchase at an agreed price including interest; Section 45U(c). From the bank's side, repo is borrowing from the RBI.
Reverse repo: Reverse repo = lending funds by purchasing securities with an agreement to resell at an agreed price including interest; Section 45U(d). From the bank's side, it is lending to the RBI.
CRR amount: CRR amount = CRR % × Net Demand and Time Liabilities (NDTL); Held as cash with the RBI. Use the rate given in the question.
SLR amount: SLR amount = SLR % × NDTL; Held by the bank itself in liquid assets. Use the rate given in the question.
Directions to NBFCs (section 45JA): RBI may direct NBFCs on income recognition, accounting standards, provisioning, capital adequacy, deployment of funds; NBFCs are bound to follow the policy and directions.

How to solve Monetary Policy and Credit Control Powers of RBI questions

Questions on this topic are either conceptual (explain a tool or section) or numerical (compute CRR or SLR). Use this method for both.

1Identify the tool or power the question tests: rate tool, reserve tool, MPC, or directions.
2State the definition in plain words, quoting the section where you are sure of it (45ZB, 45U, 45JA, section 12 of SARFAESI).
3For a numerical, write the base first (NDTL) and then multiply by the given percentage. Keep CRR and SLR separate.
4Explain the direction of effect: tightening reduces lending capacity and money supply; easing raises it.
5Link the tool to its objective: inflation target, liquidity, or soundness of the regulated entity.
6If the question names an entity (bank, NBFC, ARC), pick the correct source of power for that entity.
7Close with a one-line conclusion or recommendation.

Quickest way: Tool, direction, entity

When to use it: Use this for MCQs and short notes when you have under two minutes.

Name the tool in the option or question.
Decide if it tightens or eases money supply.
For repo versus reverse repo, ask who lends: in repo the RBI lends, in reverse repo the RBI borrows.
For MPC, recall 6 members: 3 ex officio, 3 Central Government appointees; the Governor chairs.
For directions, match the entity: NBFC means section 45JA; asset reconstruction company means section 12 of SARFAESI.

Common mistakes in Monetary Policy and Credit Control Powers of RBI

Saying the RBI appoints the three external MPC members.
Students assume the RBI controls its own committee.
Fix: Remember that the Central Government appoints the three external members and constitutes the MPC by notification.
Reversing repo and reverse repo.
The names are viewed from the RBI's side in some books and the bank's in others.
Fix: Use the Act's definitions: repo is borrowing by selling securities; reverse repo is lending by purchasing securities. Always state whose view you take.
Saying CRR is held in government securities.
CRR and SLR are mixed up.
Fix: CRR is cash kept with the RBI. SLR is held by the bank itself in liquid assets such as cash, gold and approved securities.
Applying CRR to NBFCs or citing section 45JA for banks.
All regulated entities are treated alike.
Fix: Section 45JA covers NBFCs. Section 12 of the SARFAESI Act covers asset reconstruction companies. Banks are regulated mainly under the Banking Regulation Act.
Writing that MPC decisions are only recommendations.
Confusion with advisory bodies.
Fix: Section 45ZB(4) says the MPC's decision is binding on the RBI.
Memorising current CRR, SLR or repo rates as law.
Rates are in the news and change often.
Fix: Use the rate given in the question. The answer should rest on the mechanism, not on a remembered figure.

Worked examples

Example 1

A bank has Net Demand and Time Liabilities of ₹8,00,00,000. The CRR is 4% and the SLR is 18% (rates assumed for the question). Compute the CRR balance to be kept with the RBI and the SLR assets to be held. How much is left, at most, for lending, ignoring other constraints?

Show the solution

CRR amount = 4% × ₹8,00,00,000 = ₹32,00,000.
SLR amount = 18% × ₹8,00,00,000 = ₹1,44,00,000.
Total locked up = ₹32,00,000 + ₹1,44,00,000 = ₹1,76,00,000.
Remaining = ₹8,00,00,000 − ₹1,76,00,000 = ₹6,24,00,000.

Answer: CRR balance ₹32,00,000 with the RBI; SLR assets ₹1,44,00,000; at most ₹6,24,00,000 is available for lending, ignoring other constraints.

Example 2

The Central Government wants to set up the Monetary Policy Committee. State who constitutes it, its composition, and the legal effect of its decisions under the RBI Act, 1934.

Show the solution

Under section 45ZB(1), the Central Government constitutes the MPC by notification in the Official Gazette.
Under section 45ZB(2), it has the Governor as Chairperson (ex officio), the Deputy Governor in charge of Monetary Policy (ex officio), one RBI officer nominated by the Central Board (ex officio), and three persons appointed by the Central Government.
Total membership is six.
Under section 45ZB(3), it determines the Policy Rate required to achieve the inflation target.
Under section 45ZB(4), its decision is binding on the RBI.

Answer: The Central Government constitutes the six-member MPC by Gazette notification. It determines the Policy Rate to achieve the inflation target, and its decision binds the RBI.

Exam tips

Learn section 45ZB word by word: composition, function and binding effect are favourite MCQ points.
For repo and reverse repo, quote the section 45U definitions. Both involve securities and an agreed repurchase or resale price including interest.
In numericals, compute CRR and SLR separately on the same NDTL base and use only the rates given.
In case scenarios about NBFCs or asset reconstruction companies, name the correct power: section 45JA or section 12 of SARFAESI, and list the matters on which directions can be given.
Do not quote current policy rates as facts. Explain the mechanism and effect.

Practice questions from Laws and Regulations related to Banking Sector

Monetary Policy and Credit Control Powers of RBI in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Monetary Policy and Credit Control Powers of RBI: frequently asked questions

What is the difference between repo rate and reverse repo rate?

In a repo, funds are borrowed by selling securities with an agreement to repurchase them at an agreed price that includes interest. In a reverse repo, funds are lent by purchasing securities with an agreement to resell them. Viewed from the bank, repo is borrowing from the RBI and reverse repo is lending to it.

Who is on the Monetary Policy Committee under section 45ZB?

The Governor is the Chairperson, with the Deputy Governor in charge of Monetary Policy and one RBI officer nominated by the Central Board as ex officio members. Three persons appointed by the Central Government complete the six members.

What is the difference between CRR and SLR?

CRR is the share of deposits a bank keeps as cash with the RBI. SLR is the share it keeps with itself in liquid assets such as cash, gold and approved securities. Both reduce the funds available for lending when raised.

Can the RBI issue directions to NBFCs and asset reconstruction companies?

Yes. Section 45JA of the RBI Act lets it direct NBFCs on income recognition, accounting standards, provisioning, capital adequacy and deployment of funds. Section 12 of the SARFAESI Act gives similar powers over asset reconstruction companies, and they are bound to follow them.