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Economy7 min read•Updated: 2026-08-15

RBI Monetary Policy Tools Explained: Repo, Reverse Repo, SDF, MSF & CRR for UPSC Prelims

Quantitative vs qualitative instruments, liquidity management, and MPC mandate simplified.

UPSCSphere Academic Review TeamIndian Economy & Macroeconomics Faculty

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Core Takeaways for UPSC Prelims

The Monetary Policy Committee (MPC) consists of 6 members (3 from RBI including Governor + 3 appointed by Central Govt). The Governor holds the casting vote in case of a tie.
The primary objective of monetary policy is to maintain price stability (target inflation of 4% +/- 2% CPI) while keeping in mind the objective of growth.
Standing Deposit Facility (SDF) allows RBI to absorb overnight liquidity from banks WITHOUT providing government securities as collateral.
Marginal Standing Facility (MSF) allows scheduled commercial banks to borrow overnight funds against their SLR quota (dipping into statutory reserves) at a penal rate.

1. Quantitative Tools of Monetary Policy

Quantitative tools control the total volume and cost of credit in the economy without discriminating between specific sectors:

Instrument	Definition	Effect of Rate Hike
Cash Reserve Ratio (CRR)	Fraction of Net Demand and Time Liabilities (NDTL) banks must hold with RBI as cash (earns 0% interest)	Reduces lending capacity, controls money supply
Statutory Liquidity Ratio (SLR)	Fraction of NDTL banks must maintain in liquid assets (Gold, Govt Securities, Cash)	Ensures solvency & channelizes funds to Govt bonds
Repo Rate	Rate at which RBI lends short-term money to commercial banks against collateral of Govt securities	Raises borrowing cost across the banking sector, curbing inflation
Standing Deposit Facility (SDF)	Floor of the LAF corridor; absorbs liquidity from banks without collateral	Sterilizes excess system liquidity efficiently

2. The Operational LAF Corridor Architecture

The LAF Corridor forms the benchmark interest rate band in India: • **Ceiling:** Marginal Standing Facility (MSF Rate) = Repo Rate + 25 bps • **Center / Anchor:** Policy Repo Rate (decided by MPC) • **Floor:** Standing Deposit Facility (SDF Rate) = Repo Rate - 25 bps The call money market rate normally trades within this 50 basis point corridor.

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UPSC 2026 (GS) • High Seas Treaty (BBNJ Agreement) & Kunming-Montreal GBF

Consider the following statements regarding the "Biodiversity Beyond National Jurisdiction (BBNJ)" Treaty: 1. It was adopted under the framework of the United Nations Convention on the Law of the Sea (UNCLOS). 2. It covers the territorial sea and Exclusive Economic Zones (EEZ) of sovereign coastal nations. 3. It establishes a legal mechanism for creating marine protected areas in international waters (High Seas). Which of the statements given above is/are correct? (UPSC CSE Prelims 2026)