Reserve Bank of India (RBI) : Structure, Methods Resorted, Functions|Commerce YouTube Lecture Handouts Part 2

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Reserve Bank of India (RBI): Structure, Methods Resorted, Functions | Commerce

Methods Resorted by RBI to Achieve Its Objectives

Methods Resorted by RBI to Achieve Its Objectives

Credit Control Measures


  • Bank Rate
  • Cash Reserve Ratio
  • Open Market Operations
  • Interest Rates
  • Marginal Standing Facility
  • Liquidity Standing Facility
  • Statutory Liquidy Ratio


  • Moral Suasion
  • Selective Credit Control
  • Credit Rationing and Reporting
  • Direct Action & Licensing
  • Open market operations refer to central bank purchases or sales of government securities in order to expand or contract money in the banking system and influence interest rates.
    • Cash Reserve Ratio is the proportion of funds banks have to deposit with RBI.
    • Statutory Liquidity Ratio means a portion of deposit liabilities banks are required to maintain with RBI in the form of liquid assets.
      • Bank Rate means the rate of interest at which RBI buys or rediscounts the Bills of Exchange
      • Repo Rate is the rate at which banks borrow from the RBI.
      • Reverse Repo Rate means the rate at which RBI borrows from the banks.

Credit Ratitoning

  • In Credit Rationing, RBI fixes ceiling for specific categories of loans & advances to control & regulate the purposes for which the credit is granted by commercial banks.
    • Variable portfolio ceiling: The central bank fixes a ceiling on the amount of loans & advances for each bank & the bank cannot advance loans beyond this limit.
    • Variable capital asset ratio: This is the ratio which the central bank fixes in relation to the capital of a bank to its total assets.

Moral Suasion

  • Moral suasion is a qualitative method of credit control, being used by the central bank. Under this method, the Central Bank merely uses its moral influence on the commercial banks. It includes the advice, suggestion request and persuasion with the commercial banks to co-operate with the Central Bank.
  • Marginal standing facility (MSF) is a window for banks to borrow from the Reserve Bank of India in an emergency situation when inter-bank liquidity dries up completely. Under MSF, banks can borrow funds up to one percentage of their net demand and time liabilities (NDTL) .
  • A liquidity adjustment facility (LAF) is a tool used in monetary policy, mainly by the Reserve Bank of India (RBI) , which enables banks to borrow money through repurchase agreements or banks to lend to the RBI using reverse repo rate
Policy Rates
Policy rates
Policy repo rate4.00 %
Reverse repo rate3.35 %
Marginal standing facility rate4.25 %
Bank rate4.25 %
Reserve ratios
Cash reserve ratio (CRR)3.0 %
Statutory liquidity ratio (SLR)18.00 %
Lending and deposit rates
Base rate8.95 % – 9.40 %
Marginal Cost of funds-based overnight Lending Rate (MCLR)7.80 % – 8.30 %
Savings deposit rate3.25 % – 3.50 %
Term deposit rate for > 1 year6.25 % – 7.00 %
  • Licensing of Banks & Branch licensing
  • Acts as a lender of the last resort
  • Regulator and Supervisor of the banks, payment and settlement system
  • Builds up economy՚s financial infrastructure
  • Serves as a banker to the Govt
  • Manages forex
  • Acts as the banker of commercial banks
  • Acts as the currency authority
  • Controls money supply and credit
  • Advisory body
  • Financial accommodation to co-operative banking sector
  • Financial supervision & ensures sound banking practices
  • Promotes specialized institutions
  • Public Debt office acts as CDS for G-Sec.


Q. In Open Market Operations, ________ of securities means the flow of money contracts and ________of securities means the flow of money expands. Ans. Sale, purchase

Q. ________ is the interest rate used by RBI to absorb liquidity. Ans. Reverse Repo rate

Q. Who decides the Savings deposit rate in India?

Ans. RBI