Monetary policy tools are used by the Reserve Bank of India (RBI) to control inflation, liquidity, and economic growth. These tools are very important for all banking exams like SBI PO, IBPS PO, RRB, and Clerk.
1. Repo Rate
Repo Rate is the rate at which RBI lends short-term funds to commercial banks against government securities.
- Higher Repo → Costly loans → Controls inflation
- Lower Repo → Cheaper loans → Boosts growth
2. Reverse Repo Rate
Reverse Repo Rate is the rate at which RBI borrows money from banks.
- Higher Reverse Repo → Banks park money with RBI
- Lower Reverse Repo → More lending by banks
3. CRR (Cash Reserve Ratio)
CRR is the minimum percentage of NDTL that banks must keep with RBI in cash form.
- Higher CRR → Less money for lending
- Lower CRR → More liquidity
4. SLR (Statutory Liquidity Ratio)
SLR is the percentage of NDTL that banks must keep in government securities, gold, or cash.
5. MSF (Marginal Standing Facility)
MSF is an emergency borrowing window for banks at a higher rate than Repo.
Exam Tip
Repo & Reverse Repo are part of Liquidity Adjustment Facility (LAF).
Conclusion
Understanding these tools is mandatory for clearing banking exams. Questions are frequently asked from this topic in Prelims and Mains.
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