Fundamentals of Business Economics and Management · Money and Banking

Monetary Policy and Credit Control Instruments of RBI

Q: What is the difference between CRR and SLR?

CRR is the share of a bank's NDTL kept as cash with the RBI, and it earns no interest. SLR is the share of NDTL kept by the bank itself in cash, gold or approved government securities. Both limit how much the bank can lend.

Q: What is the difference between repo rate and bank rate?

Repo rate is the rate at which the RBI lends short-term funds to banks against government securities, and it is the main active policy rate. Bank rate is the rate at which the RBI lends to commercial banks without a repo-style collateral arrangement, and it works more as a signal rate. Bank rate is aligned with the MSF rate, so it is usually higher than repo.

Q: How does the RBI control inflation using the repo rate?

When the RBI raises the repo rate, banks pay more to borrow from it. They pass this on through costlier loans. Borrowing and spending fall, demand cools, and price rises slow down.

Q: What are quantitative and qualitative credit control methods?

Quantitative methods change the total amount of credit. They include CRR, SLR, repo, reverse repo, bank rate, MSF and OMO. Qualitative methods guide who gets credit and for what use, such as margin requirements, moral suasion and credit rationing.

Updated 10 October 2026 · Fact-checked

Monetary policy is the RBI's use of tools to manage money supply and credit so that prices stay stable and the economy grows. Quantitative tools (CRR, SLR, repo, reverse repo, bank rate, MSF, OMO) change the amount of credit overall. Qualitative tools target how credit is used. To solve questions, link the tool to its direction of effect.

Understand Monetary Policy and Credit Control Instruments

Money supply and credit affect prices, jobs and growth. If too much money chases too few goods, prices rise. If credit is too tight, businesses cannot borrow and growth slows. The Reserve Bank of India (RBI) is the central bank, and it uses monetary policy to keep this balance.

Credit control instruments fall into two groups. Quantitative (general) tools change the total volume of credit in the economy. Qualitative (selective) tools change the direction of credit, meaning who gets it and for what purpose.

The main quantitative tools are these:

CRR (Cash Reserve Ratio): the share of a bank's net demand and time liabilities (NDTL) that it must keep as cash with the RBI. It earns no interest for the bank.
SLR (Statutory Liquidity Ratio): the share of NDTL that a bank must hold in safe liquid assets such as cash, gold and government securities. The bank keeps these with itself, not with the RBI.
Repo rate: the rate at which the RBI lends short-term funds to banks against government securities.
Reverse repo rate: the rate at which the RBI borrows money from banks. It is the tool used to absorb extra liquidity.
Bank rate: the rate at which the RBI lends to commercial banks (historically by rediscounting bills) without a repo-style collateral arrangement. Since 2012 it has been aligned with the MSF rate. It works as a signal rate and is used less actively today.
MSF (Marginal Standing Facility): an emergency window where banks borrow overnight from the RBI against approved securities, usually at a rate above the repo rate.
OMO (Open Market Operations): the RBI buying or selling government securities in the market.

The direction rule is simple. To fight inflation (tighten, or contract, credit), the RBI raises CRR, SLR, repo rate, reverse repo rate, SDF rate and bank rate, and sells securities. Banks then have less to lend and loans cost more, so spending falls. To boost growth (ease credit), the RBI does the opposite: it cuts ratios and rates, including the reverse repo and SDF rates, and buys securities.

Reverse repo is still a liquidity-absorption tool. The RBI uses it to absorb surplus liquidity by borrowing from banks, and a higher reverse repo rate makes parking funds with the RBI more attractive. The rate order is Reverse repo < Repo < MSF = Bank rate. Since April 2022 the SDF (Standing Deposit Facility) rate, which is the repo rate minus 0.25 percentage points, sets the floor of the rate corridor. The fixed-rate reverse repo remains a separate tool.

Qualitative tools include margin requirements on loans against securities, credit rationing, moral suasion (requests and advice to banks), direct action (penalties on banks that do not follow rules) and selective credit controls on certain commodities or sectors.

Key formulas to remember

Tightening (anti-inflation) stance: ↑ CRR, ↑ SLR, ↑ Repo, ↑ Reverse repo, ↑ SDF rate, ↑ Bank rate, OMO sale of securities ⇒ credit ↓, money supply ↓; Used when inflation is high. Banks have less lendable money and loans become costlier. Reverse repo is a liquidity-absorption tool: the RBI borrows from banks to absorb surplus liquidity, and a higher reverse repo rate makes parking funds with the RBI more attractive.
Easing (growth) stance: ↓ CRR, ↓ SLR, ↓ Repo, ↓ Reverse repo, ↓ SDF rate, ↓ Bank rate, OMO purchase of securities ⇒ credit ↑, money supply ↑; Used in a slowdown. Banks have more lendable money and loans become cheaper. A lower reverse repo rate means banks earn less for parking surplus funds with the RBI, so they are nudged to lend.
CRR amount: Required cash with RBI = CRR % × NDTL; Held as cash with the RBI. No interest is earned on it.
SLR amount: Required liquid assets = SLR % × NDTL; Held by the bank itself in cash, gold or approved securities.
Lendable funds (simple): Funds available to lend = NDTL − CRR amount − SLR amount; A simplified exam view. It shows why raising CRR or SLR reduces lending capacity.
Repo vs reverse repo: Repo: RBI lends to banks. Reverse repo: RBI borrows from banks.; Remember the viewpoint is always the RBI's.
Rate order (usual): Reverse repo < Repo < MSF = Bank rate; MSF is above repo, and the bank rate is aligned with the MSF rate. Since April 2022 the SDF (Standing Deposit Facility) rate, which is the repo rate minus 0.25 percentage points, sets the floor of the rate corridor. The fixed-rate reverse repo remains a separate liquidity-absorption tool.

How to solve Monetary Policy and Credit Control Instruments questions

Almost every question on this topic is either a definition match, a direction-of-effect question, or a small calculation on CRR or SLR. Use this method.

1Identify the question type: definition, direction of effect, quantitative or qualitative classification, or a CRR/SLR calculation.
2For definitions, ask who lends to whom. If the RBI lends, it is repo (short term, against securities) or bank rate (signal rate, no repo-style collateral arrangement). If the RBI borrows, it is reverse repo.
3For direction questions, decide whether the situation is inflation (tighten) or slowdown (ease). Then apply the matching direction to all tools.
4For CRR or SLR, check where the reserve is held. CRR is cash with the RBI. SLR is liquid assets with the bank itself.
5For calculations, find NDTL first, then multiply by the percentage. Subtract CRR and SLR amounts only if the question asks for funds available to lend.
6For classification, ask whether the tool changes the volume of credit (quantitative) or its use and direction (qualitative).
7Eliminate options that reverse the direction or mix up CRR with SLR, then pick the remaining option.

Quickest way: Direction-and-holder shortcut

When to use it: Use this for any one-line MCQ on a tool, its effect or its definition. It takes under 30 seconds.

Inflation means the RBI squeezes money, so every rate and ratio goes up and OMO is a sale.
Slowdown means the RBI releases money, so every rate and ratio goes down and OMO is a purchase.
CRR is cash with the RBI. SLR is safe assets with the bank. Say this once in your head.
Repo means the RBI lends. Reverse repo means the RBI borrows and is a liquidity-absorption tool. Usual order: reverse repo < repo < MSF = bank rate.
Moral suasion, margin and credit rationing are qualitative. Rates, ratios and OMO are quantitative.

Common mistakes in Monetary Policy and Credit Control Instruments

Saying CRR is kept with the bank itself and SLR with the RBI.
Both are percentages of NDTL, so students blur them.
Fix: CRR means cash with the RBI. SLR means liquid assets such as cash, gold and government securities held by the bank.
Reversing repo and reverse repo.
Students think from the bank's side instead of the RBI's side.
Fix: Always take the RBI's view. Repo: RBI lends. Reverse repo: RBI borrows, which absorbs extra liquidity.
Thinking a repo rate cut reduces credit.
Students confuse a cut with tightening.
Fix: A cut makes borrowing cheaper, so credit and spending rise. A cut is used in a slowdown, not against inflation.
Treating bank rate and repo rate as the same thing.
Both are rates at which the RBI lends to banks.
Fix: Repo is a short-term, collateralised, actively used tool. Bank rate is lending without a repo-style collateral arrangement, is aligned with the MSF rate, and is used less actively today.
Classifying moral suasion or margin requirements as quantitative tools.
Students assume anything that affects credit is quantitative.
Fix: Quantitative tools change the total volume of credit. Qualitative tools change the direction or use of credit. Moral suasion and margins are qualitative.
Believing OMO purchase of securities reduces money supply.
Students link buying with spending money away.
Fix: When the RBI buys securities, it pays banks or the public, so money enters the system and supply rises. A sale pulls money out.

Worked examples

Example 1

A bank has net demand and time liabilities (NDTL) of ₹500 crore. The CRR is 4% and the SLR is 18%. How much of its NDTL is left after meeting both requirements, using the simple method?

Show the solution

CRR amount = 4% × ₹500 crore = ₹20 crore.
SLR amount = 18% × ₹500 crore = ₹90 crore.
Total locked in reserves = ₹20 crore + ₹90 crore = ₹110 crore.
Funds left to lend = ₹500 crore − ₹110 crore = ₹390 crore.

Answer: ₹390 crore

Example 2

Inflation in the economy is rising sharply. Which set of actions by the RBI is most suitable? (a) Cut repo rate and buy securities (b) Raise repo rate and sell securities (c) Cut CRR and cut bank rate (d) Cut SLR and buy securities

Show the solution

High inflation means too much money is chasing goods, so the RBI must tighten credit.
Tightening means raising rates and ratios, and selling securities under OMO to pull money out.
Option (a) cuts the repo rate and buys securities. Both add money, so it is wrong.
Options (c) and (d) cut ratios or rates, which also adds money, so they are wrong.
Option (b) raises the repo rate, making loans costlier, and sells securities, absorbing money. This fits.

Answer: (b) Raise repo rate and sell securities

Exam tips

Learn the tightening and easing direction once and apply it to every tool. Most direction MCQs are solved by this alone.
Watch the wording: 'RBI lends' means repo, 'RBI borrows' means reverse repo. Mark that word in the question.
Expect classification MCQs asking which tool is qualitative. Memorise moral suasion, margin requirements, credit rationing, direct action and selective credit control.
For CRR or SLR numbers, keep the calculation simple: percentage × NDTL. Do the arithmetic only once and then match the option.
With no negative marking, never leave an option blank. Eliminate wrong directions first and then guess.

Practice questions from Money and Banking

Monetary Policy and Credit Control Instruments 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 Instruments: frequently asked questions

What is the difference between CRR and SLR?

CRR is the share of a bank's NDTL kept as cash with the RBI, and it earns no interest. SLR is the share of NDTL kept by the bank itself in cash, gold or approved government securities. Both limit how much the bank can lend.

What is the difference between repo rate and bank rate?

Repo rate is the rate at which the RBI lends short-term funds to banks against government securities, and it is the main active policy rate. Bank rate is the rate at which the RBI lends to commercial banks without a repo-style collateral arrangement, and it works more as a signal rate. Bank rate is aligned with the MSF rate, so it is usually higher than repo.

How does the RBI control inflation using the repo rate?

When the RBI raises the repo rate, banks pay more to borrow from it. They pass this on through costlier loans. Borrowing and spending fall, demand cools, and price rises slow down.

What are quantitative and qualitative credit control methods?

Quantitative methods change the total amount of credit. They include CRR, SLR, repo, reverse repo, bank rate, MSF and OMO. Qualitative methods guide who gets credit and for what use, such as margin requirements, moral suasion and credit rationing.