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RBI Policies & Rate Changes

RBI Grade B · Banking Awareness

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Core Concept

Read this first — the foundation of the topic

RBI Policies and Rate Changes form the backbone of India's monetary policy framework. The Reserve Bank of India (RBI) uses various policy tools to control money supply, inflation, and economic growth. Understanding these policies is crucial for banking exams as they directly impact banking operations. Core Policy Rates: The RBI operates through six key policy rates.

The Repo Rate is the rate at which RBI lends money to commercial banks for short-term needs. When banks need emergency funds, they borrow from RBI at this rate. The Reverse Repo Rate is exactly opposite - the rate at which RBI borrows money from banks.

The difference between Repo and Reverse Repo rates is called the Policy Corridor, typically maintained at 25 basis points. Cash Reserve Ratio (CRR) is the percentage of deposits that banks must keep with RBI in cash form. No interest is paid on CRR. Statutory Liquidity Ratio (SLR) is the percentage banks must invest in government securities.

Unlike CRR, SLR earns interest.

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Formula Block

Memorise — at least one formula appears in every paper

Policy Corridor = Repo Rate - Reverse Repo Rate = 25 basis points

CRR Impact: If CRR increases by 1%, money supply decreases by approximately 4-5 times

SLR Range: Minimum 18%, Maximum 40% of NDTL

Marginal Standing Facility (MSF) = Repo Rate + 25 basis points

Bank Rate = MSF Rate (currently same)

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Exam Patterns

What examiners ask — read before attempting PYQs

📋Questions follow these patterns

'Current Repo Rate is?', 'RBI Governor who introduced xyz policy?', 'In which year was Monetary Policy Committee formed?'. Recent exam trends show increased focus on policy changes in last 6 months and committee compositions

⚡Shortcut Technique - RRRR Method

1

CRR increase = 0.5%

2

Money multiplier effect = 1/CRR = 1/0.045 = 22.22 times

3

Previous multiplier = 1/0.04 = 25 times

4

Reduction in money supply = (25-22.22)/25 = 11.12% Answer: Money supply decreases by approximately 11% Worked Example 2: Question: Bank's NDTL is Rs. 1000 crore. CRR = 4%, SLR = 18%. Calculate total money bank must set aside.

1

CRR amount = 4% of 1000 = Rs. 40 crore (with RBI, no interest)

2

SLR amount = 18% of 1000 = Rs. 180 crore (in government securities)

3

Total reserved = 40 + 180 = Rs. 220 crore

4

Available for lending = 1000 - 220 = Rs. 780 crore Answer: Bank must set aside Rs. 220 crore, can lend Rs. 780 crore Common Mistake Alert: The #1 mistake students make is confusing Bank Rate with Repo Rate. Many think they are the same

💡Remember

Bank Rate = MSF Rate (currently), while Repo Rate is different and lower. Bank Rate is the rate for long-term loans, Repo Rate is for short-term (overnight) loans. Always check the current rates before exam as RBI changes them frequently

→Current Monetary Policy Framework

Since 2016, RBI follows inflation targeting with 4% CPI inflation target (±2% band). The Monetary Policy Committee (MPC) meets six times a year and decides policy rates through majority voting. This framework replaced the earlier multiple indicator approach.

🔑 Key Points

Repo Rate is the rate at which RBI lends to banks for short-term needs
Reverse Repo Rate is always 25 basis points lower than Repo Rate
CRR is cash kept with RBI earning no interest, SLR earns interest on government securities
Formula: MSF Rate = Repo Rate + 25 basis points
Policy Corridor = Repo Rate - Reverse Repo Rate = 25 basis points
MPC meets 6 times per year and has 6 members with Governor as chairperson
Inflation target is 4% with ±2% tolerance band since 2016
Quick trick: CRR increase by 1% reduces money supply by 4-5 times
Bank Rate currently equals MSF Rate but conceptually different from Repo Rate
SLR minimum is 18% and maximum is 40% of NDTL by law

📌 Exam Facts

Monetary Policy Committee was established in 2016 under RBI Act
Current inflation targeting framework targets 4% CPI inflation
MPC has 6 members - 3 from RBI and 3 external members
Policy Corridor is maintained at 25 basis points between Repo and Reverse Repo
SLR was reduced from 23% to 18% in 2020 during COVID-19
Marginal Standing Facility (MSF) was introduced in May 2011
Standing Deposit Facility (SDF) replaced Reverse Repo as floor rate in April 2022
RBI Governor serves for 3 years and can be reappointed

🚀 60-Second Revision

Remember: Current policy rates change frequently - check latest RBI announcements
Formula: MSF = Repo + 0.25%, Reverse Repo = Repo - 0.25%
Trap: Bank Rate ≠ Repo Rate (Bank Rate = MSF currently)
Key point: CRR earns no interest, SLR earns interest on government securities
Pattern: IBPS asks 2-3 questions on current rates and recent policy changes
Important: MPC decisions are taken by majority vote of 6 members
Focus: Last 6 months policy changes and committee appointments for current affairs

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