Critically evaluate the role of reserve requirements (CRR/SLR) in India's monetary policy framework after flexible inflation targeting was adopted.

Since 2016, India has followed flexible inflation targeting (FIT). Under Section 45ZA of the RBI Act, the target is CPI inflation of 4% ±2% [1], pursued mainly through the repo rate set by the MPC. Reserve requirements are the CRR (Sec. 42, RBI Act) and the SLR (Sec. 24, BR Act) [2]. Under FIT they have moved from being primary instruments to supporting liquidity and prudential roles.

Strengths: why reserve requirements still matter

• Defending the operating target: The RBI keeps the overnight WACR inside an SDF–MSF corridor of ±25 bps around the repo rate [3]. In October 2026, it raised the daily CRR minimum from 90% to 99% to absorb a surplus of about ₹3.88 lakh crore [4]. This pulls call rates back up towards the repo rate.
• Durable liquidity lever: The 2025 CRR cut to 3%, done in four tranches [5], did the opposite. It released durable liquidity and helped rate cuts reach borrowers.
• Flexibility outside the MPC: The RBI, not the MPC, sets CRR. This lets it adjust liquidity between policy meetings without changing its stance.
• Prudential buffer: SLR holdings of cash, gold and government securities [2] give banks a liquidity cushion and support financial stability.

Weaknesses: limits under FIT

• Implicit tax: The RBI pays no interest on CRR balances [2], and banks may pass this cost on to borrowers or depositors.
• Blurred signalling: A lever outside the MPC can muddy the repo signal, which weakens FIT's transparency.
• Market tools preferred: The RBI's own 2025 framework makes 7-day VRR/VRRR auctions the main operation [3]. Blunt reserve rules skip price discovery.
• Weaker averaging: At 99%, fortnightly averaging becomes almost a daily rule. Payment shocks then move to the call market, which risks rate spikes.
• Fiscal overlap: SLR creates captive demand for government securities, which serves fiscal needs more than monetary goals.

Overall, CRR and SLR are now auxiliary tools under FIT. They help manage liquidity and stability but are poor permanent or signalling instruments. The RBI should use CRR changes only as short-term top-ups to VRRR auctions, reverse them once conditions normalise, and explain them clearly. This keeps the repo rate as the anchor of policy and protects the credibility of the 4% inflation mandate [1].