RBI Functions and Repo Rate vs Reverse Repo Rate Explained

Quick Answer: The Reserve Bank of India (RBI) is India’s central bank: it issues currency, acts as banker to the government and to banks, regulates the banking system, manages foreign exchange reserves, and conducts monetary policy. The repo rate is the rate at which banks borrow from the RBI against securities; the reverse repo rate is the rate at which banks park surplus funds with the RBI. Repo injects liquidity; reverse repo absorbs it. The six-member MPC sets the repo rate to hold CPI inflation near 4%.

RBI at a Glance: Establishment, Structure and Headquarters

The RBI was constituted under the Reserve Bank of India Act, 1934 and began operations on 1 April 1935 as a privately owned body. It was nationalised in 1949 under the RBI (Transfer to Public Ownership) Act, 1948. Its headquarters moved to Mumbai, with the central office at Fort, Mumbai. The RBI originally started in Kolkata and shifted to Mumbai in 1937.

Governance rests with a Central Board of Directors appointed by the Government of India for a four-year term, and is chaired by the Governor, supported by Deputy Governors (a maximum of four) and government-nominated directors. This structure is a favourite one-liner in IBPS and SBI prelims awareness sections.

Core Functions of RBI Mapped to the IBPS/SBI Awareness Syllabus

Exam papers typically phrase questions around these six core functions, so learn them as a fixed list:

• Monetary authority: formulates and implements monetary policy to maintain price stability while supporting growth, using the repo rate and other instruments.
• Issuer of currency: the RBI is the sole authority for issuing currency notes (except the one-rupee note and coins, issued by the Government of India but circulated by the RBI).
• Banker to the Government: manages borrowing, public debt, and accounts of the Centre and States; also advises on economic policy.
• Banker to banks and lender of last resort: maintains banks’ accounts, settles inter-bank claims, and provides emergency liquidity.
• Regulator and supervisor of the financial system: licenses banks, sets prudential norms (capital, NPA classification), and protects depositors under the Banking Regulation Act, 1949.
• Custodian of foreign exchange reserves and manager of the development agenda: manages forex reserves, administers FEMA 1999, and promotes financial inclusion, payment systems (UPI, NEFT, RTGS) and rural credit.

Monetary Policy Toolkit: Repo, Reverse Repo, CRR, SLR, MSF, Bank Rate

Under the Liquidity Adjustment Facility (LAF), the RBI manages day-to-day liquidity. Understand each instrument in plain English:

• Repo rate: the rate at which banks borrow from the RBI against government securities. A higher repo makes bank borrowing costlier, which eventually raises loan rates.
• Reverse repo rate: the rate at which banks lend surplus funds to the RBI against securities. It sets a floor for short-term money market rates and absorbs excess liquidity.
• Cash Reserve Ratio (CRR): the percentage of Net Demand and Time Liabilities (NDTL) banks must keep as cash with the RBI. It earns no interest.
• Statutory Liquidity Ratio (SLR): the percentage of NDTL to be maintained in liquid assets such as cash, gold, and approved government securities held by the bank itself.
• Marginal Standing Facility (MSF): banks can borrow overnight from the RBI by dipping into their SLR portfolio (up to a prescribed limit) at a rate above repo — the corridor ceiling.
• Bank rate: a penal, long-term rate at which the RBI lends (also used for charges on some advances); it is aligned with the MSF rate and moves automatically with policy changes.

Repo Rate vs Reverse Repo Rate: Key Differences Table

Policy Corridor: How Repo, MSF and SDF Fit Together

Since April 2022, the RBI’s liquidity corridor has repo at the middle, the MSF as the ceiling, and the Standing Deposit Facility (SDF) as the floor, each typically 25 basis points away from the repo rate. The SDF replaced the fixed reverse repo as the floor and, crucially for exams, it does not require collateral — banks simply deposit surplus funds with the RBI and earn the SDF rate. This lets the RBI absorb liquidity without needing a stock of securities. The reverse repo rate still exists under the LAF but is no longer the operative floor of the corridor.

CRR vs SLR: What Exam Aspirants Confuse Most

Memory hook: CRR = liquidity control; SLR = solvency support.

Key Banking Terms Every Aspirant Must Know

• Base rate / MCLR / EBLR: successive internal/external benchmark lending regimes. Since October 2019, most floating-rate retail loans are linked to an external benchmark (like the repo rate), so repo changes pass through to EMIs faster.
• Priority sector lending (PSL): a mandated share of adjusted net bank credit (40% for domestic scheduled commercial banks) to agriculture, MSMEs, weaker sections, education, housing and renewable energy.
• Non-performing assets (NPAs): a loan becomes non-performing when interest/principal remains overdue for more than 90 days.
• Inflation targeting: the flexible framework introduced in 2016 (amended RBI Act, Section 45ZA) under which the MPC targets CPI inflation.

Monetary Policy Committee (MPC): Composition and Inflation Target

The MPC was constituted in September 2016 under Section 45ZB of the RBI Act. It has six members: the RBI Governor (Chairperson), a Deputy Governor in charge of monetary policy, one officer of the RBI nominated by the Central Board, and three external members appointed by the Central Government. Decisions are by majority; in a tie, the Governor has the casting vote. The MPC meets at least four times a year. India’s inflation target is 4% CPI inflation with a tolerance band of ±2% (i.e., 2–6%), notified by the Government and reviewed every five years.

How RBI Controls Inflation and Liquidity: Exam Framing

Frame it as a two-way switch for MCQs:

• Tight (contractionary) policy: repo, MSF, SDF and CRR raised → borrowing becomes costlier → loan demand and money supply fall → inflation cools. Also called “hawkish”.
• Accommodative (expansionary) policy: repo and CRR cut → credit becomes cheaper → EMIs fall, investment and consumption rise → growth supported. Also called “dovish”.

So when inflation runs above 6%, expect the RBI to raise the repo rate; when growth needs support, expect cuts — this cause-and-effect chain is exactly how bank exam questions are framed.

Previous-Year Style Questions and Rapid Revision Points

• RBI established: 1 April 1935 (RBI Act 1934); nationalised: 1949; HQ: Mumbai.
• Repo = banks borrow from RBI; Reverse repo = banks park funds with RBI.
• SDF introduced April 2022 — corridor floor, no collateral required.
• MSF = corridor ceiling; Bank rate moves in tandem with MSF.
• CRR: cash with RBI, no interest, Section 42 of RBI Act. SLR: securities/gold with bank, Section 24 of BR Act.
• MPC: 6 members, Governor has casting vote, meets at least 4 times a year.
• Inflation target: 4% CPI, band 2–6%, reviewed every 5 years.
• NPA norm: overdue beyond 90 days. PSL target: 40% of ANBC.

Practice pointer: “Which instrument does not earn interest for banks?” → CRR. “Which facility absorbs liquidity without collateral?” → SDF. “Who chairs the MPC?” → RBI Governor.

For the latest policy rates and notifications, always verify against the official source at rbi.org.in; inflation and government notifications can also be cross-checked on pib.gov.in.

Frequently Asked Questions

Q: What is the difference between repo rate and reverse repo rate?

Under repo, banks borrow from the RBI against government securities; under reverse repo, banks park surplus funds with the RBI. Repo adds liquidity to the system; reverse repo absorbs it. Repo is the policy rate set by the MPC, while the SDF rate now forms the corridor’s floor.

Q: Who sets the repo rate in India?

The six-member Monetary Policy Committee, headed by the RBI Governor, decides the policy repo rate by majority vote. The Governor holds the casting vote in case of a tie.

Q: What is India’s inflation target?

CPI inflation of 4% with a tolerance band of ±2% (2–6%), set under the RBI Act after Government notification. The target is reviewed every five years.

Q: What replaced reverse repo as the floor of the policy corridor?

The Standing Deposit Facility (SDF), introduced in April 2022. Unlike reverse repo, the SDF does not require collateral, allowing the RBI to absorb unlimited liquidity without securities.

Q: Is CRR kept with RBI and does it earn interest?

Yes — CRR is cash maintained with the RBI, and banks earn no interest on it. This “zero-return” feature makes it one of the RBI’s strongest monetary policy tools.

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