Quantitative tools of monetary policy

Also called: General credit controls, Quantitative credit control · Topic: Banking, Credit Creation and Monetary Policy · NCERT: Class 12, Ch 3 "Money and Banking"

Meaning

Quantitative tools of monetary policy are the general tools the Reserve Bank of India (RBI) uses to change the total amount and the cost of credit and money supply in the whole economy, without targeting any one sector. The main tools are the Cash Reserve Ratio (CRR), the Statutory Liquidity Ratio (SLR), the repo rate, the reverse repo/Standing Deposit Facility (SDF), the bank rate/Marginal Standing Facility (MSF) and open market operations (OMO).

They matter because they are how the RBI works towards its legal goal. That goal is price stability "while keeping in mind the objective of growth" [5]. They decide how much banks can lend and at what interest rate.

Simple money multiplier (ignoring SLR and cash held by the public) = 1 / CRR

Explanation

How they work: two levers, volume and cost

• Volume levers change how much money banks have free to lend:
• CRR: the share of a bank's deposits that it must keep as cash with the RBI. This cash earns no interest.
• SLR: the share of deposits that a bank must keep itself in safe, liquid assets (cash, gold and government bonds).

• OMO: the RBI buys or sells government bonds. This adds cash to banks or takes it away.

• Cost levers change the price at which banks get money:

• Repo rate: the interest rate at which the RBI lends money to banks for a short time against securities.
• SDF / reverse repo: the rate the RBI pays when it takes surplus money from banks.

• MSF / bank rate: a higher rate for emergency or penal borrowing from the RBI.

• General, not selective: these tools affect all sectors together. Qualitative tools, such as margin requirements and moral suasion, guide credit towards some sectors or away from others.

The base: NDTL

• CRR and SLR are calculated on Net Demand and Time Liabilities (NDTL), not on total deposits.
• Demand liabilities: money the bank must pay whenever the customer asks, e.g. savings and current accounts.
• Time liabilities: money the bank must pay after a fixed period, e.g. fixed deposits.
• NDTL = (Demand + Time liabilities) − assets held with other banks.

Worked example (₹ crore)

• Demand liabilities 600 + time liabilities 400 = 1,000. Minus interbank assets of 50 gives NDTL = 950.
• CRR at 3%: 950 × 3% = ₹28.5 crore kept with the RBI, earning no interest.
• SLR at 18%: 950 × 18% = ₹171 crore kept by the bank in SLR assets.
• Left for lending: 950 − 171 − 28.5 = ₹750.5 crore.
• Money multiplier:
• CRR 4% → 1/0.04 = 25.
• CRR 3% → 1/0.03 ≈ 33.3.

• So ₹100 of new reserves can support about ₹3,333 of deposits instead of ₹2,500.

• Repo cost: a bank borrows ₹1,000 crore overnight at 5.25%. The interest is 1,000 × 0.0525 ÷ 365 ≈ ₹14.4 lakh.

Expansionary vs contractionary use

• Basis point (bp): 1 bp = 0.01 percentage point, so 100 bps = 1 percentage point.
• Expansionary policy (to support growth): cut the repo rate, cut CRR or SLR, or buy bonds through OMO.

• Repo cut → banks borrow more cheaply → loan rates fall → people and firms borrow and spend more → demand rises.

• Contractionary policy (to control inflation): raise rates, or sell bonds through OMO.

• Repo rate up → loans cost more → people borrow and spend less → demand and prices cool.

Tool	Move	Liquidity	Money supply
CRR	Cut	Rises	Rises (multiplier up)
SLR	Cut	More lendable funds	Rises
Repo	Cut	Cheaper borrowing	Rises
Bank rate/MSF	Raise	Costlier emergency funds	Falls
OMO	Purchase	Injects	Rises
OMO	Sale	Absorbs	Falls
Reverse repo/SDF	Raise	Absorbs more	Falls

In India

• Who manages the tools: the RBI, set up in 1935.

• Under RBI Act s.45ZB, a 6-member Monetary Policy Committee (MPC) sets the repo rate. The Governor is Chair. There are 3 RBI members and 3 external members, and each external member serves a 4-year term [5].

• Target (RBI Act s.45ZA): the Central Government, after consulting the RBI, sets a CPI inflation target of 4%, with an upper limit of 6% and a lower limit of 2% [5].

• It was renewed on 25 March 2026 for 1 April 2026 to 31 March 2031 [5].

• The target counts as missed if average inflation stays above 6% or below 2% for three quarters in a row [5].

• Operating target: the weighted average call rate (WACR), i.e. the average rate at which banks lend to each other overnight. The RBI keeps it close to the repo rate by adding or taking out liquidity [5].

• The legal basis of each tool:
• CRR comes from RBI Act s.42. It is kept as an average daily balance with the RBI [5].

• SLR comes from Banking Regulation Act s.24. It is kept by the bank as cash, gold or unencumbered G-secs (government bonds not already pledged for a loan) [5].

• Latest levels (August 2026) [2]:

Rate	Level
SDF (floor)	5.00%
Repo (policy rate)	5.25%
MSF / Bank rate (ceiling)	5.50%

• Recent use of the tools:
• Repo rate: cut to 4% by May 2020 during COVID. Raised by 250 bps (4% → 6.5%) from May 2022 to February 2023. Cut by 125 bps (6.5% → 5.25%) by December 2025.
• Holds in 2026: the rate was unchanged at the MPC's 60th meeting (April 2026) and 61st meeting (June 2026) [3]. In August 2026 the MPC voted unanimously to keep it at 5.25%, with a neutral stance [2].
• CRR: cut from 4% to 3% of NDTL in four 25-bp steps, announced in June 2025. The last step took effect from 29 November 2025 [4].

• SLR: now 18% (check the current level), down from a peak of 38.5% in 1990.

• Where NCERT is outdated:

• The Class 12 book presents the bank rate as an active lending lever. Today it is aligned with the MSF and used mainly for penal charges.
• The book shows the reverse repo as the floor of the corridor. The SDF replaced it in April 2022.

Don't confuse with

• Qualitative (selective) tools: margin requirements and moral suasion direct credit to or away from particular sectors. Quantitative tools change the total volume and cost of credit across the whole economy.
• CRR vs SLR: CRR (RBI Act s.42) is kept with the RBI as cash and earns no interest. SLR (Banking Regulation Act s.24) is kept by the bank itself in cash, gold or G-secs.
• Repo vs outright OMO: repo is a temporary injection for overnight, 7 or 14 days, and it reverses at the end of the term. An outright OMO changes durable (long-lasting) liquidity permanently [5].
• Repo rate vs bank rate: the repo rate is the policy rate, and the loan is backed by securities as collateral. The bank rate has no repo collateral, equals the MSF (5.50% in August 2026) and is used mainly for penalties [2].

Prelims Hooks

• CRR and SLR are both calculated on NDTL, not on total deposits. A common trap is to swap their Acts: CRR comes from RBI Act s.42 and SLR from Banking Regulation Act s.24.
• The LAF corridor in August 2026 was SDF 5.00% < Repo 5.25% < MSF = Bank rate 5.50%, a width of 50 bps [2].
• The SDF replaced the fixed-rate reverse repo as the floor of the corridor in April 2022.
• The CRR was cut to 3% of NDTL in four 25-bp steps and took full effect from the fortnight starting 29 November 2025 [4]. The simple multiplier (1/CRR) rose from 25 to about 33.3.
• The inflation target (CPI 4% ± 2%) is set by the Central Government in consultation with the RBI under s.45ZA, not by the RBI alone [5].
• The RBI's operating target is the WACR, not the repo rate itself [5].

Mains Points

• Inflation vs growth trade-off: the RBI Act asks for price stability "keeping in mind" growth [5]. The RBI raised rates by 250 bps in 2022-23, cut them by 125 bps in 2025, and held at 5.25% with a neutral stance in 2026 [2][3]. This shows the trade-off: cutting too early can bring inflation back, and holding rates high for too long can slow growth.
• Weak transmission (passing rate cuts on to borrowers): a repo cut works only if banks lower their loan rates. Banks are slow to do this because they have already promised fixed rates to depositors. So the RBI combined rate cuts with a 100-bp CRR cut in 2025 [4], which freed cheap funds for lending.
• SLR, captive borrowing and accountability (GS-III/GS-II):
• The SLR guarantees buyers for government bonds, which keeps government borrowing cheap. But it locks up bank money that could be lent to private firms (financial repression). Cutting the SLR from 38.5% (1990) to 18% was a key banking reform.
• The MPC and the s.45ZA target, which has a legal definition of "failure", make the RBI accountable. They also help keep monetary policy separate from the government's borrowing needs [5].

Related concepts

• Monetary policy
• Expansionary monetary policy
• Contractionary monetary policy
• Cash Reserve Ratio
• Net Demand and Time Liabilities
• Statutory Liquidity Ratio
• Bank rate
• Open market operations
• Outright open market operations
• Repo rate

Read more

• Monetary policy and its quantitative instruments