Banking and Insurance - Laws and Practice · Regulatory Framework of Banks

Monetary Policy and Credit Control Powers of RBI

Updated 11 October 2026 · Fact-checked

RBI controls money and credit using quantitative tools (CRR, SLR, repo, reverse repo, open market operations) that change overall liquidity, and qualitative tools (margins, purpose limits, moral suasion) that steer credit. Its legal power to direct banks comes mainly from sections 21 and 35A of the Banking Regulation Act, 1949.

Understand Monetary Policy and Credit Control Powers of RBI

Monetary policy is the way the central bank manages money supply and the cost of credit to keep prices stable and support growth. In India, the Reserve Bank of India (RBI) does this. Banks create credit from deposits. If RBI wants less credit, it makes money costlier or scarcer. If it wants more, it does the opposite.

Credit control tools fall into two groups. Quantitative (general) tools affect the total volume of credit. These include CRR (cash reserve ratio), SLR (statutory liquidity ratio), the repo rate, the reverse repo rate and open market operations. Qualitative (selective) tools affect the direction and use of credit. These include margin requirements on secured advances, limits on advances for particular purposes, and moral suasion.

CRR is the share of a bank's net demand and time liabilities that it must keep as cash with RBI. SLR is the share it must hold in liquid assets such as government securities, cash or gold. CRR is held with RBI and earns no interest as a rule. SLR assets stay with the bank and are mostly interest-bearing securities. Do not confuse the two in an answer.

Repo is borrowing funds from RBI by selling securities with an agreement to repurchase them later at an agreed price that includes interest. Reverse repo is lending funds by buying securities with an agreement to resell them. Section 45U of the RBI Act, 1934 defines both. A higher repo rate makes borrowing costlier and tends to reduce credit.

The Banking Regulation Act, 1949 gives RBI legal power to bind banks. Under section 21, RBI may determine the advances policy and give directions on purposes, margins, ceilings on advances and guarantees to one borrower, and interest rates and terms. Under section 35A, it may issue directions in public interest, banking policy, to protect depositors or to secure proper management. Section 35AB covers directions on stressed assets. For NBFCs, section 45JA of the RBI Act gives similar powers, and section 45L covers financial institutions.

Key rules to remember

Section 21, BR Act: policy on advances: RBI satisfied (public interest / depositors' interest / banking policy) → determines advances policy → banks bound to follow; Section 21(3) says every banking company must comply with directions given under this section.
Section 21(2): subjects of directions: (a) purposes of advances; (b) margins on secured advances; (c) maximum advances to one borrower; (d) maximum guarantees for one borrower; (e) interest rate and other terms; Limits in (c) and (d) consider paid-up capital, reserves and deposits of the bank. Learn the five heads in order.
Section 35A, BR Act: general directions: Grounds: public interest; banking policy; prevent affairs being detrimental to depositors or the bank; secure proper management; RBI may modify or cancel directions under 35A(2), on representation or on its own motion, with conditions.
Section 35AB and 35AA: 35AB: RBI may direct banks on resolution of stressed assets. 35AA: Central Government may authorise RBI to direct banks to start insolvency under IBC; 35AB also allows RBI to specify authorities or committees to advise banks. 'Default' in 35AA has its IBC meaning.
Section 45JA, RBI Act: NBFCs: RBI may determine policy and give directions on income recognition, accounting standards, provisioning, capital adequacy, deployment of funds; NBFCs are bound to follow. Section 45L lets RBI call for information and give directions to financial institutions to regulate the credit system.
Repo and reverse repo (section 45U): Repo = borrow by selling securities, repurchase later. Reverse repo = lend by buying securities, resell later; Price at repurchase or resale includes interest. Both are money market instruments under the Act.
CRR versus SLR: CRR = cash with RBI. SLR = liquid assets held by the bank itself; Both are a percentage of net demand and time liabilities. The rates are set by RBI from time to time, so never quote a current rate as fixed law.

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

Exam questions on this topic are written and case-based. Use provision, analysis and conclusion.

1Read the question and identify whether it asks about quantitative tools, qualitative tools, or legal power to give directions.
2Name the tool or section that applies, such as CRR, repo, section 21 or section 35A.
3State the rule in plain words with its conditions, for example the grounds on which RBI must be satisfied.
4Apply it to the facts: say what RBI did, what effect it has on liquidity or credit, and whether it fits the listed powers.
5If the facts involve a direction, check that the subject falls under section 21(2) or the grounds in section 35A(1).
6Conclude clearly: is the direction valid and binding, and what must the bank do?
7Add a compliance or drafting point, such as board compliance, reporting to RBI or representing for modification under section 35A(2).

Quickest way: Tool, effect, section

When to use it: Use for short notes and 5 to 8 mark questions when time is tight.

Write a one-line definition of the tool.
Write the direction of effect: tightening reduces credit, easing increases it.
Cite the supporting section only if you are sure of it.
Close with one line on binding effect on banks.

Common mistakes in Monetary Policy and Credit Control Powers of RBI

Saying SLR is kept with RBI in cash.
Both CRR and SLR sound like reserve requirements.
Fix: CRR is cash with RBI. SLR is held by the bank in liquid assets such as government securities.
Mixing up repo and reverse repo.
The names are viewed from RBI's side in news, but the definition is from the borrower's side.
Fix: Repo: sell securities to borrow, repurchase later. Reverse repo: buy securities to lend, resell later. Say who is lending.
Citing section 45JA for banks.
Students remember RBI Act directions but not the entity covered.
Fix: Section 45JA applies to NBFCs. For banking companies, use sections 21, 35A and 35AB of the BR Act.
Treating section 21 and section 35A as the same.
Both let RBI give directions.
Fix: Section 21 deals with advances policy, with five specific heads. Section 35A is general and wider, with its own grounds.
Quoting a current CRR or repo rate as fixed law.
Rates appear in news and students memorise them.
Fix: Say rates are set by RBI from time to time. Mention numbers only as illustration.
Listing only quantitative tools when asked for credit control measures.
Selective tools are less memorable.
Fix: Always cover both groups: quantitative and qualitative, with a line on each tool.

Worked examples

Example 1

Distinguish between CRR and SLR as tools of credit control.

Show the solution

Define CRR: the portion of net demand and time liabilities a bank must hold as cash with RBI.
Define SLR: the portion of net demand and time liabilities a bank must maintain in liquid assets, such as cash, gold or government securities, with itself.
Compare: CRR is with RBI and usually earns no interest. SLR assets stay with the bank and generally earn returns.
Effect: raising either reduces the funds the bank can lend. Raising CRR removes cash directly from lending capacity.
Both rates are set by RBI from time to time as part of monetary policy.

Answer: CRR is a cash balance kept with RBI, while SLR is a holding of liquid assets kept by the bank itself. Both are percentages of net demand and time liabilities, and raising either tightens credit.

Example 2

RBI issues a direction to Sagar Bank Ltd. limiting the maximum advance it may give to any one company, and fixes a margin on loans secured against stored commodities. The bank says RBI cannot interfere in its lending. Advise.

Show the solution

Provision: under section 21(1) of the Banking Regulation Act, 1949, if RBI is satisfied it is necessary in public interest, depositors' interest or banking policy, it may determine the advances policy, and banks are bound to follow it.
Section 21(2) lists the subjects, including margins on secured advances (b) and the maximum advance to any one company, firm, association or individual (c).
Analysis: both directions fall squarely within clauses (b) and (c).
Section 21(3) says every banking company must comply with directions given under the section.
Conclusion: the bank's objection fails. The directions bind it.

Answer: Sagar Bank must comply. Both the borrower exposure limit and the margin fall under section 21(2)(c) and (b), and section 21(3) makes compliance mandatory. The bank may make a representation, but must follow the directions meanwhile.

Exam tips

For 'credit control' questions, structure the answer as quantitative tools first, then qualitative tools.
Learn the five heads of section 21(2) as a list. Examiners frame facts that map to one head.
In case problems, show the ground on which RBI is satisfied before the conclusion.
Keep tool definitions short and spend time on the legal power and its binding effect.
Contrast banks (BR Act sections 21, 35A) and NBFCs (RBI Act section 45JA) when the facts mention both.

Practice questions from Regulatory Framework of Banks

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.

CMA FinalMonetary Policy and Credit Control Powers of RBI

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

What is the difference between CRR and SLR?

CRR is a share of net demand and time liabilities kept as cash with RBI. SLR is a share kept by the bank itself in liquid assets such as government securities. Both are set by RBI and used to control liquidity.

What are the quantitative and qualitative credit control measures of RBI?

Quantitative measures change the overall volume of credit. They include CRR, SLR, repo, reverse repo and open market operations. Qualitative measures guide where credit goes, such as margin requirements, limits on purposes of advances and moral suasion.

Which section gives RBI power to issue directions to banks?

Section 35A of the Banking Regulation Act, 1949 gives general power to issue directions, and section 21 covers advances policy. Section 35AB covers stressed assets. Banks are bound to comply with these directions.

What are repo and reverse repo?

A repo is borrowing funds by selling securities with an agreement to repurchase them later at an agreed price including interest. A reverse repo is lending funds by buying securities with an agreement to resell them. Section 45U of the RBI Act defines both.