Upsc Cse Free Material (Optimistic Ias)

UPSC CSE Free Material (OPTIMISTIC IAS)
https://t.me/upscmaterialoptimisticias
Pillar1A2: 🤑🤑 Money Supply (M0-M4) & Monetary Policy- CRR, SLR, Repo
Previous Years' official UPSC MCQs also given in this handout. You can see that UPSC is not going into
microscopic details of RBI's Operational/technical guidelines. Very simple-broad-overview type MCQs asked.
So, ✋ Donot live in 😰😰imaginary fear that.... का��नक डर मे मत �जयो के …
⇒ Inexperienced Pvt Mock Test-walla asking random/technical Qs so I must do PHD 🎓🎓✋
⇒ EconomicTimes / Financial Express/ Hindu-BusinessLine columnist are writing long winded columns on
RBI's Operation Twist or TLTRO so I must do PHD 🎓🎓✋
Table of Contents
11 🤑🤑Money’s Demand, Supply & Creation .................................................................................................. 32
11.11 🤲🤲 Demand of Money: Liquidity Preference Theory (तरलता अ�धमान) ............................................. 32
11.12 💸💸💸💸Supply of Money (मुद्रा क� पू�त) ................................................................................................... 32
11.12.1 💸💸💸💸💸💸Measures of Money Supply (मुद्रा आपू�त के प�रमाण) ..................................................... 33
11.13 💸💸💸💸💸💸Factors Affecting Money Supply [M1, M3] ..................................................................... 34
11.13.1 😷😷😷😷😷😷😷😷Corona-2020 impact on Money Supply M0 and M3 as per 📔📔📔📔ES21 ....... 34
11.14 💸💸💸💸 Creation of Money (मुद्रा का �नमार्ण) ........................................................................................... 35
11.15 💸💸⚡Money Multiplier (मुद्रा गुणक) .................................................................................................... 35
11.15.1 💸💸⚡Money Multiplier Before Corona as per ES20 .............................................................. 36
11.15.2 💸💸⚡: 😷😷Corona-2020 impact on money multiplier as per ES21 ...................................... 36
11.15.3 💸💸 Misc. topic: Velocity of Money Circulation (मुद्रा सं चालन का वेग) ......................................... 37
12 🐯🐯🐯🐯 Monetary Policy (मौिद्रक नी�त)............................................................................................................ 37
12.11 🐯🐯🐯🐯🐯🐯 MonPolicy: Quantitative Tools (प�रमाणा�क साधन) .......................................................... 38
12.11.1 🗄🗄✂Statutory Reserve Requirements: CRR, SLR (Fight inflation: ↑, deflation: ↓) ............ 38
12.12 🐯🐯🐯🐯✂🗓🗓 CRR, SLR: Development in Recent Years .................................................................. 39
12.12.1 🐯🐯🐯🐯✂🗓🗓 (2016): Incremental CRR during Demonetization (नोटबं दीमे वृ�द्धशील सीआरआर) 39
12.12.2 🐯🐯🗄🗄✂🗓🗓 (2020-Feb) CRR Exemption for 5 yrs, depending on loans (सीआरआर म� छू ट) .. 39
12.12.3 🐯🐯🐯🐯✂🗓🗓 (2020-Mar) CRR ⏬ from 4% to 3% in 👻👻Atmanirbhar Bharat.................. 40
12.12.4 🐯🐯🐯🐯✂🗓🗓 (CRR Technical things NOTIMP ...................................................................... 40
12.12.5 🐯🐯🐯🐯🐯🐯 MonPolicy → Quant Tools → Rates → Bank rate (ब�क दर): ............................... 41
12.13 🐯🐯🐯🐯🐯🐯 MonPolicy → Quant Tools → Rates → LAF Repo (2000) ......................................... 41
12.13.1 (2020) 🐯🐯🐯🐯:Repo Rate ⏬ to cheapen the loans & revive economy ................................ 42
12.13.2 (2020) 🐯🐯🐯🐯Reverse Repo Rate cut & Policy corridor Changed asymmetrically .............. 43
12.13.3 (2020) 🐯🐯🐯🐯🐯🐯 Long Term Repo Operations (LTROs) ...................................................... 44
12.13.4 🐯🐯🐯🐯🐯🐯🐯🐯:Targeted Long Term Repo Operations (TLTRO: ल��त दीघर्का�लक रेपो)............ 44
12.13.5 🎓🎓TLTRO- Useless Doubts by novice students (बाबू-शोना /क�े �खलािड़यों के फालतू प्र�) ............. 44
12.13.6 🐯🐯🐯🐯🐯🐯🐯🐯 RBI’s special or flexible liquidity window to help MF ................................... 45
12.13.7 🐯🐯🐯🐯🐯🐯 MonPolicy → Quant Tools → Rates → MSF (2011) ......................................... 45
12.13.8 MonPolicy → Quant Tools → ® Rates- associated terms ...................................................... 45
12.13.9 🐯🐯🐯🐯🐯🐯 Market Operations (OMO, MSS): (Inflation → Sell G-Sec, Deflation → Buy) 46
(Batch: PCB2) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 30
12.14 🐯🐯🐯🐯🐯🐯🐯🐯MonPolicy: Quantitative Tools → Operation Twist .............................................. 46

12.14.1 🔪🔪🔪🔪: Security → Debt → G-Sec & Bonds (ऋण के �लए जारी क� गई प्र�तभू�तयां) ......................... 47
12.14.2 🔪🔪🔪🔪:🤵🤵Corporate Bonds: factors that determine its interest rate ..................................... 47
12.14.3 🔪🔪🔪🔪: 🤑🤑 Bond Yield (बांड म� �नवेश करने पर होने वाली आय या मुनाफा) ............................................. 47
12.14.4 🔪🔪🔪🔪: 🤑🤑 Bond Yield ∝ 1/Price (स�े म� खरीदा तो मुनाफा �ादा) ................................................. 47
12.14.5 🔪🔪🔪🔪: 🤑🤑 Bond yield: other factors affecting it (अ� कारक) ................................................. 48
12.14.6 🐯🐯🐯🐯🐯🐯🐯🐯Operation Twist: why? ...................................................................................... 48
12.14.7 🐯🐯🐯🐯🐯🐯🐯🐯RBI’s Operation Twist: methodology (2019-Dec).......................................... 48
12.14.8 ✋🎓🎓 🔪🔪🔪🔪: 🤑🤑 Bond Yield & Inverted Yield Curve: Concepts with poor cost-benefit
for exam 49
12.15 🐯🐯🐯🐯🐯🐯 Monetary Policy: Qualitative Tools (गुणा�क साधन) ........................................................ 49
12.15.1 � Moral Suasion (नै�तक दबाव / सलाह) & Publicity (प्रचार) ......................................................... 50
12.15.2 �🚯🚯 Direct Action (सीधी कायर्वाही: �ोिक लातो के भुत बातो से नहीं मानते) .......................................... 50
12.15.3 💍💍 Margin Requirements / Loan to Value (LTV) (सीमा अ�नवायर्ता) ........................................... 50
12.15.4 Selective Credit Control (चयना�क ऋण �नयं त्रण)............................................................................ 50
12.16 🐯🐯🐯🐯🐯🐯 Priority Sector Lending (PSL: प्राथ�मकता �ेत्र के �लए ऋण मानक) ........................................... 51
12.16.1 🐯🐯🐯🐯🐯🐯 PSL Reforms-2020: on RRB/SFB/UCB?................................................................ 52
12.16.2 🐯🐯🐯🐯🐯🐯 PSL Reforms-2020: Startups, Renewable Energy and Healthcare ...................... 52
12.16.3 🐯🐯🐯🐯🐯🐯 PSL Reforms-2020: Weightage to poor districts (गरीब/�पछड़े �जलों को भारांक) ......... 53
12.16.4 🐯🐯🐯🐯🐯🐯:📜📜 Priority Sector Lending Certificates (PSLC) from 2016 onwards ............... 53
12.17 📢📢 � Monetary Policy Tools: A Ready Reckoner Table .............................................................. 54
12.18 📢📢 Monetary Policy in Present-Day India ....................................................................................... 54
12.18.1 📢📢 Monetary Policy Making under RBI Act since 2016 ........................................................ 55
12.19 📢📢 Review of Monetary Policies ........................................................................................................ 57
12.20 🐯🐯🐯🐯🐯🐯RBI’s Monetary Policies: Corona MarchToApril’20 ..................................................... 59
12.20.1 👻👻ATMANIRBHAR → Gist of RBI’s March2April 2020 Announcements: ..................... 60
12.20.2 🐯🐯🐯🐯🐯🐯RBI’s Monetary Policies: 2020-August .................................................................. 60
12.20.3 🐯🐯🐯🐯🐯🐯RBI’s Monetary Policies: 2020-October................................................................. 61
12.20.4 Monetary Policy: 2020-December ............................................................................................. 61
12.20.5 Monetary Policy: Feb-2021 update ........................................................................................... 61
12.20.6 ✋🚫🚫 Monetary Policy bi-monthly announcements: ignored.............................................. 62
12.21 🔪🔪🔪🏠🏠🏠🏠 Banks’ Lending Rates % (ब�क ऋण क� �ाज दर�) .............................................................. 62
12.21.1 🔪🔪🔪🏠🏠🏠🏠 Bank’s loan interest rate: MCLR system(2016) ............................................... 63
12.21.2 🔪🔪🔪🏠🏠🏠🏠 Bank’s loan interest rate: External Benchmark (बाहरी ब�चमाकर् ) ......................... 63
12.21.3 😷😷Corona-2020 impact on Deposits interest rate & Loans interest rate as per ES21 ........ 63
12.22 🔇🔇 Limitations of Monetary Policy in India (मयार्दाए)....................................................................... 64
12.22.1 ✍Conclusion / �न�षर् ................................................................................................................ 65
12.22.2 �🎺🎺🎺🎺1⃣✋ Mock Questions for UPSC Mains/GSM3 (250 words) ................................ 65
11 🤑🤑MONEY’S DEMAND, SUPPLY & CREATION
11.11🤲🤲 DEMAND OF MONEY: LIQUIDITY PREFERENCE THEORY (तरलता अ�धमान)
British Economist John Maynard Keynes (Book: The General Theory of Employment, Interest and Money,
1936) noted that people prefer to keep a part of assets in liquid form (cash money) with 3 motives:
1. 🌽🌽 Transaction motive (सं �वहार उद्दे�): For using money as a medium of exchange e.g. for buying daily
milk, vegetables and fruits.
2. 💊💊 Precautionary motive (एह�तयाती): To protect against sudden / unforeseen expenditure e.g. medical
emergency or impulsive purchase during a holiday trip.
3. 📉📉 Speculative motive (सट्टा-उद्दे�): Investors hold cash to make the best use of any investment
opportunity that arises later e.g. waiting for gold / land prices to fall, then “I will use my cash to buy it”.
Also known as "Asset Demand of Money".
The amount of money held in cash form vary inversely with interest rates. If higher interest available in Bank
Deposits, Bonds etc. → people would invest money there, instead of keeping money in liquid form (cash).
11.12 💸💸📥📥SUPPLY OF MONEY (मुद्रा क� पू�त)
🗓🗓 Time Liabilities of a Bank (FDRD) 💪💪 Demand Liabilities of a Bank (CASA)
समय / मीयादी देयताएँ मांग देयताएं
- Fixed deposits, Cumulative/ recurring deposits, - Current Account, Savings Account, Demand
Staff security deposit etc. Draft
- Bank legally not required to pay customer before - Overdue balance in Fixed Deposits
maturity. But may pay after deducting penalty/ - Unclaimed deposits.
interest.
Public parks more money here, because better LESS
returns / higher interest rates.
LESS More liquid because easily convertible into cash on
demand.
⇒ Bank deposits suddenly ⏫ in the aftermath of Demonetisation-2016 (because the public was required to
deposit banned notes in their bank account). However, afterwards the growth of bank deposits has fallen.
⇒ 📔📔📔📔ES21: Corona-2020: Initial months of lockdown the growth of (demand) deposit⏬⏬ because
people withdrew money in panic / precautionary motive. Although in the later months → Unlock down
and normalcy → ⏫⏫Quantity of deposit. तालाबं दी के शु�आती महीनों म� लोगों ने एह�तयाती कारणों से ब�कों से अपनी
िडपॉ�जट �नकाली हालांिक प�र��त सामा� होने पर, बाद के महीनों म� वापस बचत क� मात्रा म� बढ़ोतरी होने लगी है

Fb : Abhijeet Pratap Singh avi
🔠🔠❓ Which of the following is not included in the assets of a commercial bank in India? (Prelims-2019)
(a) Advances (b) Deposits (c) Investments (d) Money at call and short notice
11.12.1 💸💸💸💸💸💸Measures of Money Supply (मुद्रा आपू�त के प�रमाण)
- Money supply means the total amount of money in an economy at any given time.
- Money supply plays a crucial role in the determination of 1) price level (=inflation) and 2) interest rates
on deposits & loans. मुद्रा क� आपू�त महंगाई दर और �ाज दरों पर असर करती है
- RBI measures the money supply through indicators: M0, M1, M2, M3, M4
Table 1: *CU: Coins & Currency with Public
Commercial Banks Post Office Savings Bank
Measure Demand Time Demand Liquidity Qty
*CU Time
सं कु �चत, �ापक Deposits Deposits Deposits तरलता मात्रा
Deposits
(CASA) (FDRD) (SA)
Narrow M1 ✓ ✓ ✗ ✗ ✗ ☆☆☆☆ ☆
Money M2 ✓ ✓ ✗ ✓ ✗ ☆☆☆ ☆☆
Broad M3 ✓ ✓ ✓ ✗ ✗ ☆☆ ☆☆☆
Money M4 ✓ ✓ ✓ ✓ ✓ ☆ ☆☆☆☆
- Self-Extrapolate e.g. M3 = M1 + Time deposits with commercial banks. (�यं से फामूर्ला बनाइए)
- M3 is the most commonly used measure of money supply, also known as “Aggregate Monetary
Resources / Aggregate Money Supply” (सम� मौिद्रक सं साधन).
- In above formulas for money supply, we are only counting the “NET Demand / NET Time deposits” i.e.
only public deposits in bank. We are not counting interbank deposits i.e. one commercial bank’s deposit
in other commercial banks. एक ब�क से दू सरे ब�क म� पैसा िडपॉ�जट िकया हो तो उसे नहीं �गनते इधर
- Liquidity= ease of converting an asset into cash. Cash is the most liquid asset.
o Highly liquid assets (अ��धक तरल सं प��): Gold, Demand deposits, G-Sec/T-Bill, shares/bonds of
reputed companies. तुरंत खरीदार �मल जाते ह� इस�लए अपनी सं प�� को आप नगदी धन म� आसानी से प�रव�तत कर सकते ह�
o Relatively illiquid assets: Home/Real estate, Paintings/Sculptures etc. Because difficult to find
buyers at right price instantly. खरीदार आसानी से नहीं �मलता इस�लए इन सं प��यों क� तरलता थोड़ी कम है
- Liquidity injection / infusion (तरलता अ�ः�ेपण) refers to phenomenon when RBI buys Bank/NBFCs’ G-
Sec/T-bill/financial assets to provide them with cash.
🔠🔠❓ If you withdraw Rs. 1,00,000 in cash from your Demand Deposit Account at your bank, the
immediate effect on aggregate money supply in the economy will be _ _ . (UPSC-Prelims-2020)
[a) to reduce it by ₹ 1,00,000 [b) to increase it by ₹ 1,00,000
[c) to increase it by more than ₹ 1,00,000 [d) to leave it unchanged
11.13💸💸💸💸💸💸FACTORS AFFECTING MONEY SUPPLY [M1, M3]
M1, M3 Money Supply will ⏫ when:
- When Money multiplier and / or Velocity of money ⏫.
- When RBI’s asset side ⏫ e.g. Government borrowing more from RBI using G-sec or increase in RBI’s
foreign securities. (is there are limit on how much money can Government borrow? Ans. YES. We’ll see
in Pillar2 → FRBM Act.)
- With the ⏫in banking penetration, financial inclusion (�व�ीय समावेशन)
- Boom period, Whenever loan demand ⏫ (तेजी का माहौल लोन �ादा �लए जा रहे हो)
- When RBI adopts Cheap / Easy / Dovish / Expansionary monetary policy to combat deflation.
Table 2: Following also affect money supply (given in NCERT,not greatly imp so don’t lose sleep)
Currency - = ratio of (money held by the public) divided by (public’s deposit in banks).
Deposit Ratio - For example, cdr ⏫ during the festive season as people convert deposits to cash
(CDR) balance for meeting extra expenditure.
Reserve - = (A commercial bank’s vault cash+its deposits with RBI such as CRR) divided by
Deposit Ratio (public’s deposit in banks).
(RDR) - Vault Cash= banks keep some money with themselves for meeting day to day
withdrawal by depositors & for misc. business expenses.
11.13.1 😷😷💸💸💸💸💸💸Corona-2020 impact on Money Supply M0 and M3 as per 📔📔📔📔ES21
Note: There may be 500 other factors as well affecting these indicators but gives poor:cost benefit learning all
those things from MCQ point of view. वा��वक �जंदगी म� और भी 500 कारकों के चलते इन आंकड़ों पर असर होता है लेिकन उन सब
क� पं चात करने बैठे तो परी�ा के �लए उपयोगी नहीं #⏳📚📚थोड़ा-पढ़ो-आगे-बढ़ो
M0 ⇒ Corona-2020: M0 increased mainly ⏫ because:

⇒ To keep the ₹:$ exchange rate stable, Reserve Bank’s ⏫purchases (of Dollars & other Foreign
Currency) from Authorised Dealers (ADs) in the Foreign Currency Exchange Market → ⏫ ₹₹
Currency supply in the market. [More in Pillar#3: Balance of Payment] �पया और डॉलर क� �व�नमय दर
को ��र रखने के �लए �रजवर् ब�क ने बाजार से डॉलर करी दे और सामने �पए मुहयै ा कराए �जसके चलते आर��त मुद्रा (M0) क�
मात्रा म� बढ़ोतरी �ई - �पछले साल क� तुलना म�
M3 ⇒ M3 =Coin and currency with public + Demand deposits with banks + Time deposits with bank
⇒ Corona-2020: overall M3⏫ due to expansionary monetary policy of RBI (CRR⏬, Repo⏬
etc) �रजवर् ब�क क� �व�ार वादी नी�तयों के चलते बढ़ोतरी �ई - �पछले साल क� तुलना म�
11.14💸💸🖨🖨 CREATION OF MONEY (मुद्रा का �नमार्ण)

M0 / Reserve Money / Government Money / High Powered Money (उ� श�� मुद्रा) is issued under RBI Act, by
RBI’s ISSUE DEPARTMENT, with condition that ISSUE DEPARTMENT’s assets must match its liabilities.
Assets of Issue Department (प�रसं प��याँ) Liabilities of Issue Department [M0]
1. Rupee coins [RBI ‘buys’ coins & ₹1 notes from Govt Total Currency notes (& coins & ₹1 notes) in
and circulates it as the ‘Agent of govt’] circulation, which consists of:
2. Gold coins [Min. ₹ 200 crores] सोने के �स�े 1. Held by Public
3. Gold bullion [Min. ₹ 115 crores] सोने क� �टे 2. Held by other Banks in “Vault cash” (i.e.
4. Foreign Securities, incl. IMF [Earlier Min. ₹ 400 crores amount kept by banks for day to day
but Post-1995 no such requirement.] Operations.)
5. (Indian) Govt. Securities [through which Govt 3. Other Deposits in RBI (of Public*, Banks
borrows money from RBI & returns Principal + & Governments)
Interest at later date] सरकारी प्र�तभू�तयां
* such as PM Garib Kalyan Yojana (2016) under which Blackmoney holder was required to deposit 25% of his
blackmoney in RBI for a lock-in period of 4 years. More in Pillar#2
😲😲 Moral outrage: Where is the repo, where is the profit, how can ₹1 coin be on asset side as well
as liability side? How did RBI print money before “THIS” to acquire gold? ++500-jaat-ke-doubts.
My Ans. Please refer to Viral Kohli’s wedding snapshot in the PowerPoint.
11.15💸💸⚡MONEY MULTIPLIER (मुद्रा गुणक)

RBI’s Cash Reserve Ratio (CRR) leads to Fractional Reserve Banking & Credit Creation by the commercial
banks, which creates money multiplier effect as following:
Table 3: this process is called 'Fractional Reserve Banking & Credit Creation'
High Powered money (M0) = 100 Asset Side Loaning 10% Reserve (‘R’)
Bank#1 100 90 10
Bank#2 90 81 9
Bank#3 81 72.9 8.1
Bank#.. .. .. ..
Total Money (here M3) Total sum = ₹1000**
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑜𝑜𝑜𝑜 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 (𝑀𝑀3) 1000
𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴 𝑴𝑴𝑴𝑴𝒍𝒍𝒕𝒕𝒕𝒕𝒕𝒕𝒕𝒕𝒕𝒕𝒕𝒕𝒕𝒕 = = =10
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑜𝑜𝑜𝑜 𝐻𝐻𝐻𝐻𝐻𝐻ℎ 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚(𝑀𝑀0) 100
** 😲😲 Moral Outrage: How can loan and CRR be counted in M3? Ans. They’re not counted.
But, before money went into loans & CRR, it was sitting on deposit side. M3 counts deposits.
#Kohli-wedding-snapshot.
- Every “R” reserve generates “1/R” new money. Here, 10% reserve (R) generated 1/R = (1/1(/10%)]= 10x
times the high-powered money.
- 4% reserve ratio will generate [1/(1/4%)]= 25x times (in theory), however in reality the multiplier may be
lower, due to poor banking penetration.
- In a functional economy, money multiplier is always greater than 1.
o & It directly improves with reduction in CRR.
o & It indirectly improves as economy develops, consumption / loan demand increases, banking
penetration, digital economy/less-cash economy etc.
o In 1960s = less than 2x, 90s = more than 3x, At present = more than 5x.
11.15.1 💸💸⚡Money Multiplier Before Corona as per 📔📔📔📔ES20
Figure 1: source- Economic Survey 2020, zigzag pattern means 'not increasing steadily'.
- 📘📘📘📘ES20: Between mid-1990’s to 2016-17: Money multiplier (measured as a ratio of M3/M0) was
mostly ⏫. But 2017-18 onwards: Money Multiplier is ⏬. Could be attributed to the lack of growth in
loaning activities & slowdown in economy.
11.15.2 💸💸⚡: 😷😷Corona-2020 impact on money multiplier as per 📔📔📔📔ES21
⇒ Money Multiplier = M3 divided by M0
⇒ Money Multiplier mostly ⏫increasing from 1980s onwards up to 2016-17, has however been declining
⏬since then. multiplier 5.6 (2019) but ⏬ to 5.5 (2020) = Money Multiplier didn't grow / remained
suppressed / muted / Impaired in Corona-2020. Reasons? → कोरोना के दौरान मुद्रा गुणांक दबा �आ या मूक रहा �ोंिक:
⇒ 😰😰Slowdown in economy, demand for loans ⏬ → so, bank deposited large amount of money with RBI
under reverse repo. लोग लोन म� पैसा लेने के �लए कमाए इस�लए ब�कों ने अपनी अ�त�र� रा�श �रजवर् ब�क म� ही �रवसर् रेपो रेट के ��प म�
जमा करा दी
⇒ 😰😰if banks continuously loaned ₹₹ to households & business firms then M3 would grow thru 'zigzag'
lending-deposit activity from One bank account to another bank account यिद वह पैसा �रज़वर् ब�क म� �रवसर् रेपो रेट म�
डालने क� वजह, ब�क वाले लोन म� घुमाते तो मुद्रा गुणक म� बढ़ोतरी दजर् होती, लेिकन कोरोना के चलते लोगों म� लोन क� उ�ुकता कम देखी गई
⇒ 😰😰Then 📔📔📔📔ES21 tried to entered in technical commentary that If we ignore the Reverse repo rate
money parked in RBI then "Y" thing would have happened etc but Poor cost benefit for exam.
#⏳📚📚थोड़ा-पढ़ो-आगे-बढ़ो Even if some inexperienced to private quizmaster setup faltu MCQs from it.
⇒ 😰😰if people keep more portion of cash in hand and less in banks-deposits then Money multiplier will not
improve. Corona= ⏫ rise in cash:deposit ratio, as people drawing cash from bank account fearing
lockdown / precautionary motives [At Least,In the initial months of lockdown]. तालाबं दी के शु�आती महीनों म�
लोगों ने एह�तयाती कारणों से ब�कों से अपनी िडपॉ�जट �नकाली इस कारण भी, मुद्रा गुणक म� बढ़ोतरी नहीं हो पाई.
🔠🔠❓ Money Multiplier in an economy increases with _ _ _? (UPSC-Prelims-2019)
A. Increase in the cash reserve ratio
B. Increase in the banking habit of the population
C. Increase in the statutory liquidity ratio
D. Increase in the population of the country
11.15.3 💸💸 Misc. topic: Velocity of Money Circulation (मुद्रा सं चालन का वेग)
It is the average number of times money passes from one hand to another, during given time period. e.g. you
bought pen worth Rs.10 from shopkeeper, he uses same ₹10 note to buy tea from another shop, then same
currency note performed function of 20 Rupees. िकतनी बार एक नोट एक हाथ से दू सरे हाथ म� जाता है?
This “Velocity of money circulation” is affected by following factors:
- Income distribution: Money in the hands of poor people has higher velocity than the rich people.
- If more people borrow money for purchase → higher velocity. Hence developed countries => higher
velocity, because people save less and spend more because of consumerist lifestyle and confidence in
Government’s social-security e.g. USA. (जब लोगों म� बचत क� भावना कम हो)
- Boom period in economy = more raw material purchase & hiring = higher velocity. (तेजी का माहौल)
- Other 500-jaat-ke permutation-combination-PHD = poor cost:benefit for exam
- What is its scene in Corona? Answer not given in 📔📔📔📔ES21 so no point in SELFPHD.
12 🐯🐯📢📢 MONETARY POLICY (मौिद्रक नी�त)

- [Definition] Monetary Policy is a macroeconomic policy (सम�� आ�थक नी�त), designed by the central bank of
a country, to manage money supply & interest rates. It helps shaping variables such as inflation,
consumption, savings, investment, and capital formation (मुद्रा-आपू�त व �ाजदरो को �नयं �त्रत करके मुद्रा��त/महंगाई,
मांग/खपत, बचत, �नवेश, पूंजी �नमार्ण को आकार देना).
- [Significance] Monetary policy plays an important role in price stability [inflation control], economic
growth, job creation and social justice in any economy. (महंगाई-�नयं त्रण, आ�थक वृ�द्ध, रोजगार सृजन, सामा�जक �ाय के
�लए मह�पूणर् साधन)
- Milton Friedman: American economist whose research on monetary policy made this subject more
popular, he also won a Nobel in Economics in this regard (1976).
- Philip Curve: Inflation ↑ = unemployment ↓ (and vice versa). मं हगाई बढ़ेगी तो बेरोजगारी घटेगी. मं हगाई कम होगी तो
बेरोजगारी बढ़ेगी. (More in Pillar#4C)
- Therefore, stable & moderate inflation is good for the economy. (��र व म�म�र महंगाई अथर्तंत्र के �लए अ��)
- So, RBI tries to keep inflation with 2-6% Consumer Price Index (CPI: All India) using its bi-monthly
monetary policy made by its 6- member statutory Monetary Policy Committee. (छ:-सद�वाली वैधा�नक स�म�त
द्वारा िद्व-मा�सक मौिद्रक नी�त �नमार्ण करके �रजवर् ब�क महंगाई दर को उपभो�ा मू� सूचकांक के िहसाब से २-६% म� �नयं �त्रत करने क� को�शश
करता है)
12.11🐯🐯📢📢📐📐 MONPOLICY: QUANTITATIVE TOOLS (प�रमाणा�क साधन)
Also known as (aka) General or Indirect Tools as they affect the entire economy, and not just a particular
sector. (सामा� या अप्र�� उपकरण �ोंिक यह िकसी एक �ेत्र-�वशेष को नहीं िकंतु पूरी अथर्�व�ा को असर करते ह�)
12.11.1 🗄🗄✂Statutory Reserve Requirements: CRR, SLR (Fight inflation: ↑, deflation: ↓)
Figure 2: depositors waiting in a queue & demanding- हमारा paisa wapas kro, ABHI KE ABHI!
- CRR and SLR are collectively known as “Variable Reserve Ratios” or “Statutory Reserve Ratios”
(प�रवतर्नीय / वैधा�नक आर��त अनुपात)
CRR SLR
Full form: Cash Reserve Ratio Full form: Statutory Liquidity Ratio
(नकद कोष अनुपात) (वैधा�नक तरलता अनुपात)
Banks must keep this much deposits (or balance) Banks must keep this much deposits in liquid assets
with RBI. RBI doesn’t pay interest on this deposit, such as cash, gold, G-Sec, T-Bills, State
except in extraordinary circumstances like 1999’s Development Loan Bonds and other securities
CRR SLR
Banking slowdown. (ब�क ने जमाकतार्ओ ं से हांसील क� �ई रकम notified by RBI. (ब�क ने जमाकतार्ओ ं से हांसील क� �ई रकम का
का कु छ िह�ा �रजवर् ब�क मे जमा करना पड़ेगा।) कु छ िह�ा, �रजवर् ब�क द्वारा मा� तरल प�रसं प�तमे �नवेश करना होगा)
Bank earns no profit / interest, as such. Some profit may be involved. (मुनाफा हो सकता है)
- CRR: first suggested by the British economist Mandated under Banking Regulation Act, 1949
J.M. Keynes & first introduced in US Federal (ब�िकंग �व�नयमन अ�ध�नयम के अनुसार इसे लागू िकया जाता है)
Reserves (=Central Bank of USA).
- Mandated under RBI Act, 1934
RBI can fix any amount of CRR, legally there is no Legally, SLR can’t be more than 40%.
minimum or maximum limit. Presently it is 18.00% of NDTL.
Corona-2020: it was 3% of Net Demand & Time
Liabilities of a bank (NDTL: �नवल मांग और समय देयताएँ )
2021-May: it’ll be gradually increased to 4%
- All Banks must keep CRR. (ब�क के �लए अ�नवायर्) Similar to left cell of this table.
- However, RBI may prescribe separate %
norms/slabs for Regional Rural Banks (RRBs)
and Cooperative Banks. More in 📑📑Pillar1B1:
classification of Banks
✋Difference between NDTL, ODTL, Total DTL?= NOT IMP4IAS. If you want to satisfy your curiosity, do
google search yourself but I don’t t think it as best use of my/your time. #ARJUN-Fisheye
- CRR-SLR are counted on fortnightly basis. If not maintained, bank will have to pay penalty interest rate
to RBI. Penalty rate (जुमार्ना) is linked with Bank Rate.
- CRR-SLR ensure monetary stability of India through two primary functions:
1) CRR assists in money multiplier effect,
2) CRR-SLR provide buffer/protection during a Bank Run (ब�कों म� से जमारा�श वापस लेने क� दौड़) i.e. an
emergency when every depositor wants to pull out money from his bank account at once, mainly
due to fake news / rumors.
- While in theory CRR/SLR can be used for inflation control but RBI primarily relies on REPO Rate (=its
Policy Rate) to combat inflation, and not CRR/SLR. (हालांिक, महंगाई �नयं त्रण के यह मु� साधन नहीं है)
12.12🐯🐯🐯🐯✂🗓🗓 CRR, SLR: DEVELOPMENT IN RECENT YEARS
12.12.1 🐯🐯🐯🐯✂🗓🗓 (2016): Incremental CRR during Demonetization (नोटबं दीमे वृ�द्धशील सीआरआर)
- During demonetization (2016-17): public required to deposit the banned ₹500-1000 ke notes in banks.
So, banks’ deposits increased drastically.
- During that time, RBI temporarily prescribed Incremental CRR.
- ✋What it was? how did it work? Ans. 6 years old technical topic for Prelims-2021. Very poor cost
benefit in preparing #🕰🕰थोड़ा-पढ़ो-आगे-बढ़ो.
12.12.2 🐯🐯🐯🐯✂🗓🗓 (2020-Feb) CRR Exemption for 5 yrs, depending on loans (सीआरआर म� छू ट)
2020-Feb: RBI instructed the banks:
⇒ Whatever new (retail) loans you give for (1) automobiles (2) residential housing / home mortgages. (3)
MSMEs [After 31/Jan/2020 upto 31/Jul/2020]

⇒ You can subtract that much loaned ₹₹ amount from deposits while computing cash reserve ratio (CRR)
for the next five years (from the date when the loan was given or other technical norms, which are not
important). (वाहन, मकान और छोटे उद्योगों को कजर् िदया तो सीआरआर म� ब�क को छू ट �मलेगी)
⇒ In other words, if a bank gives more loans to the above 3 sectors, it’ll have to keep ⏬ CRR → ⏫
loanable funds → profit to the bank. And more loans → more business activity → economic growth for
the country.
12.12.3 🐯🐯🐯🐯✂🗓🗓 (2020-Mar) CRR ⏬ from 4% to 3% in 👻👻Atmanirbhar Bharat
Figure 3: कोरोना महामारी से जुज़ रही अथर्�व�ा पुनज��वत करने के �लए सीआरआर मे कटोती करना मं गता है।
- To revive Indian economy after Corona, RBI made certain changes in its monetary policy during March-
April-2020 period.
- Parallelly, Govt also took announced relief in tax-filling, free-food to poor etc.
- Collectively, Modi labelled these actions of [RBI + Government] = “Atmanirbhar Bharat Economic
revival package”. 📑📑More in Pillar#4C.
⇒ 2020-March: RBI announced 100 basis points (bps) cut (=1%) cut in CRR. so Earlier 4%-1%=3% CRR for
a period of 1 year (upto 2021-March). This will ⏫ the loanable funds available with the banks.
⇒ 2021: now moving towards economic recovery, enough loanable funds in banks available so, RBI ordered
restoration/⏫ of CRR in two phases: 3.5% (2021: March2May ) →4% (2021-May) वापस बढ़ोतरी
12.12.4 🐯🐯🗄🗄✂🗓🗓 (CRR Technical things NOTIMP
Following technical operational aspects of CRR not imp / poor cost benefit in studying for exam
- What is Automated sweep-in and sweep-out (ASISO) facility? NOTIMP
- What is Flexible Automated Option for Managing CRR? NOTIMP
- ✋Further, Banks are required to calculate CRR on a fortnightly (15 days) basis. They have to maintain at
least 90% of that amount in CRR on daily basis. RBI also ⏬ minimum daily CRR balance maintenance
from 90% to 80% upto 2020-June
- Above type of of information is not really important for the scope of civil service exam. So, don’t lose
sleep if some idiotic private Mocktest quiz master framing MCQs like this.
🔠🔠❓Cash reserve ratio refers to _ _ _ . (UPSC-CDS-i-2020)
(a) the share of Net Demand and time liabilities (NDTL) that banks have to hold as liquid assets
(b) the share of NDTL that banks have to hold as balances with the RBI
(c) the share of Net demand and time liabilities that banks have to hold as part of their cash reserves
(d) the ratio of cash holding to reserves of banks
12.12.4.1 🗄🗄✂🗓🗓 SLR reduction to 18% of NDTL
In 2018, RBI notified that SLR will be gradually reduced to 18% of NDTL in following phases
Year January 5, April 13, July 6, October 12, January 4, April 11,
2019 2019 2019 2019 2020 2020 onwards
SLR 19.25% 19.00% 18.75% 18.50% 18.25% 18.00%
🔠🔠❓Find correct statements about SLR: (UPSC-CDS-2011-II)
1. To meet SLR, Commercial banks must keep cash only.
2. SLR is maintained by the banks with themselves.
3. SLR restricts the banks leverage in pumping more money into the economy.
Answer codes:(a) 1, 2 and 3 (b) 1 and 3 (c) 2 and 3 (d) only 2
🔠🔠❓When RBI reduces SLR by 50 basis points which of the following is likely to happen? (UPSC-Pre-2015)
(a) India's GDP growth rate increases drastically.
(b) Foreign Institutional Investors may bring more capital into our country.
(c) Scheduled Commercial Banks may cut their lending rates.
(d) It may drastically reduce the liquidity to the banking system.
12.12.5 🐯🐯🐯🐯🐯🐯 MonPolicy → Quant Tools → Rates → Bank rate (ब�क दर):
Bank Rate MSF Repo Rate
Introduced in RBI Act, 1934** 2011 2000
What is the % Since 2012: Bank Monetary Policy
MSF = Repo% + “x”%
rate? Rate% = MSF% Committee decides
All clients of RBI: bank,
Who can borrow
Only banks non-bank, Union &
from the RBI?
State Govt
Collateral Bank can pledge securities from its Yes, G-Sec/T-bill. But
**Yes and No
required? SLR quota not from SLR
Loan duration Longer than repo Short term usually overnight to 14 days
Nowadays mainly for Emergency borrowing by bank,
Short term borrowing
Primary Utility? deciding penalty on using their securities from SLR
by all clients of RBI.
errant banks quota subject to certain limits.
⇒ **RBI Act, 1934: “Bank rate is the standard rate at which RBI buys or rediscounts first class securities,
bills of exchange or other commercial papers.(-NCERT)” rediscounting basically means the “repo-walla
game= RBI buys @x price, re-sells@y price where y>x”
⇒ But, since the introduction of the Repo rate in the 2000s, the Bank rate has become a dormant tool (�न��य
उपकरण =not frequently used by RBI for lending or by banks for borrowing).
⇒ So, reference books/websites differ in its present operational status e.g. some of them would say:
o Bank rate requires no collateral and is meant for long term loans.
o Bank rate accepts collateral which can be both GSec/T-bill as well as private companies’
securities.
So, in the real exam, it depends on which book/web source the examiner has copied the statement(s) and
accordingly you’ve to take a judgement call in ticking the answer.
12.13🐯🐯🐯🐯🐯🐯 MONPOLICY → QUANT TOOLS → RATES → LAF REPO (2000)
RBI’s Liquidity Adjustment Facility (LAF, तरलता समायोजन सु�वधा): has two windows:
® LAF-Repo Rate (�रपो दर/पुन: क्रय-अनुबंध) ® ® LAF-Reverse Repo Rate (उलट �रपो/ पुन: क्रय-अनुबंध)
The Interest rate at which RBI lends short-term It’s the interest rate that clients earn when parking
loans to its clients, keeping their G-Sec as their surplus funds with the RBI for short periods, to
collaterals. (�रजवर् ब�क अपने ग्राहको को लघु अव�ध के ऋण देता earn interest. (ग्राहक अपना अ�त�र� धन, �रजवर् ब�क मे लघु
है। उसपर लागू �ाज दर को �रपो दर कहेते है। ग्राहक ने अपनी सरकारी अव�ध के �लए जमा कर जो �ाजदर कमाते है, उसे उलट-�रपो-दर
प्र�तभू�तयों को �रजवर् ब�क मे �गरवी रखना पड़ता है) कहेते है)
Clients enter into an agreement with RBI to Mechanism similar to Repo, RBI gives its G-Sec as a
repurchase their G-sec at a future date at a (higher) collateral.
pre-determined price.
Banks can’t pledge their SLR-quota-G-Secs for this
borrowing.✋
- Repo also called ‘Ready Forward Transaction’. Reverse Repo Rate = Repo% MINUS x%
- Repo Rate is our Policy Rate to control
inflation. (मौिद्रक नी�त दर)
Notes:-
⇒ Repo = RBI lends short term loans its clients, & demands G-Sec/T-bill as collateral. Every place I’ve not
mentioned T-bill, as it just blocks the speed of revision.
⇒ Market Repo = Players other than RBI (such as bank, NBFCs) loaning short money to other
Banks/NBFCs/Corporate Companies, and demanding financial securities (G-Sec/T-
Bill/shares/bonds/commercial paper etc.) as collateral. What do those terms mean? Ans. Ref the table
given in topic Operation Twist.
12.13.1 (2020) 🐯🐯🐯🐯:Repo Rate ⏬ to cheapen the loans & revive economy
Figure 4: कोरोना महामारी से जुज़ रही अथर्�व�ा पुनज��वत करने के �लए �रपो दर मे कटोती करना मं गता है।
⇒ 2019: repo was in the range of 5-6%. Then, 2020-Corona → 👻👻Atmanirbhar Bharat RBI’s monetary
polices from Mar-April-May-2020 → REPO Rate ⏬ to 4%
⇒ Stance: Accommodative. Means in the next meeting they will either ⏬ repo or keep it unchanged. But
no chance of ⏫the repo rate in next meeting.
⇒ Theoretically: ⏬repo → ⏫demand → ⏫ inflation but, RBI expects that inflation will be under
control because:
⇒ Monsoon will be normal so food prices (& resultant inflation) will be under control.
⇒ Corona-led Economic slowdown → demand⏬ → inflation should⏬.
⇒ Crude oil prices also under control due to Corona slowdown.
⇒ Thus, inflation is going to be remain under control. Therefore, large reduction in repo rate WAS justified
to boost economic growth in 🤧🤧Corona.
⇒ However, 2020-July-August: CPI >6.5% which is above the 2-6% limit.
⇒ So, then, ideally RBI should ⏫the repo rate to combat inflation, but that will make the loans expensive
and harm the post-corona economic revival. so the RBI kept the repo rate unchanged. (महंगाई से लड़ने के �लए
अगर लोन महंगे कर िदए तो कोरोना महामारी प�ात भारतीय अथर्तंत्र को पुनज��वत करना मु��ल होगा इस�लए �रजवर् ब�क के दरों म� कोई
बदलाव नहीं िकया गया)
⇒ Besides, the present inflation is caused by supply-side problems due to lockdown. Once the unlockdown
progresses → supply ⏫ → inflation ⏬. so changes in the repo rate not required at present. (लॉकडाउन
हटने प�ात वैसे भी बाजार म� चीज व�ुओ ं क� आपू�त बढ़ेगी तो अपने आप महंगाई काबू म� आ जाएगी.)
⇒ To conclude, basically it is kept unchanged @4% from May-2020 afterward upto 2021-Feb when I’m
writing this note.
12.13.2 (2020) 🐯🐯🐯🐯Reverse Repo Rate cut & Policy corridor Changed asymmetrically
Figure 5: sir, जब तक आप loan के �लए हाँ नही कं ह�गे, हम आपको telemarketing calls करते रह�गे!
MSF REPO Reverse Repo Total width
What? Banks borrow short All clients borrow short term Clients park Policy corridor
term funds from RBI by funds by pledging G-Sec. surplus funds in (नी�त ग�लयारा)
pledging G-Sec from But, banks can’t pledge SLR RBI to earn
SLR-quota quota G-Sec interest
Before R+25 bps R% R-25 bps 25+25=50bps
After R+25 bps R% R-65bps* 25+65=90bps
2020- 4.25% 4.00% 3.35% 25+65=90bps
May (40bps cut than earlier rate)
⇒ *Corona led economic slowdown → Loan demand ⏬ → banks parking their excess funds in RBI to
earn interest in the form of reverse repo rate. ब�क वाले अपना अ�त�र� धन �रज़वर् ब�क म� डाल के बैठे �बठाये �ाज कमा रहे थे.
⇒ By 2020-March: banks parked ₹~3 lakh crores in RBI in Reverse Repo.
⇒ So, RBI has drastically ⏬the reverse repo rate to discourage such laziness of banks.
⇒ Benefit of reverse repo reduction?
 IF SBI offers 5.9% Fixed deposit interest rate to depositors, and parks it in the RBI reverse repo
rate (3.35%) then SBI will actually make losses.
 So, RBI hopes SBI will now be ‘forced’ to give loans in a proactive manner (through SMS-spam,
email-spam and unwanted telemarketing calls)
Although as per 📔📔📔📔ES21, Banks still continued to park their surplus funds in Reverse repo because there
were not enough loan takers due to Corona slowdown.
12.13.3 (2020) 🐯🐯🐯🐯🐯🐯 Long Term Repo Operations (LTROs)
⇒ Usually, Repo loans are for short term borrowing from overnight to 14-days.
⇒ But, 2020-Feb: RBI announced to conduct Long Term Repo Operations (LTROs: दीधर् अव�ध के रेपो ऋण) of 1
year and 3 years tenors.
⇒ RBI will loan total ₹ 1,00,000 crore, in various rounds through E-Kuber platform.
⇒ RBI’s clients can apply to borrow a minimum ₹1 crore or higher.
⇒ Interest rate: prevailing repo rate. Interest rate will be compounded annually. (वा�षक �प से चक्रवृ�द्ध �ाज)
⇒ This will ⏫ loanable funds with banks → economic growth can be revived.
⇒ MSF and (short term) repo lending will also be continued separately as per their own existing norms.
LTRO doesn’t aim to eliminate / replace them. (बाक� जो लघु अव�ध के उपकरण है, वह भी जारी ही है)
Further operational guidelines, how it impacts the bond yields etc. = poor cost:benefit
12.13.4 🐯🐯🐯🐯🐯🐯🐯🐯:Targeted Long Term Repo Operations (TLTRO: ल��त दीघर्का�लक रेपो)
Figure 6: @Banks- jo Long term REPO loan diyaa hai uskaa certain % you must give to Bond Market
⇒ Tenure? upto 3 years
⇒ Interest Rate? FLOATING RATE linked with REPO Rate. Its exact formula? NOTIMP
⇒ Total quantity? First round 1.0= ₹1 lakh crore, round 2.0=₹50,000 crore and so on but figures NOTIMP.
⇒ If a bank borrows ₹₹ from this window → then
o within “X” number of days,
o bank must invest Y% of this borrowed money
o in Bond market/ debt securities (such as corporate bonds/non-convertible debentures,
commercial papers etc.) issued by “Z” borrower.
o “Z” could be a Corporates, Mutual Funds, Non-Banking Financial Companies (NBFCs) and
housing finance companies (HFCs).
⇒ 🤩🤩Benefit? (इससे �ा फायदा होगा)
o Debt securities are primary source of funding for NBFCs and HFCs. This measure will help them
obtain funds to revive business. (गैर ब�िकंग �व�ीय कं प�नयों को मदद �मलेगी)
o Similarly, Mutual Funds and industrialists who need funds, will benefit.
12.13.5 🎓🎓✋TLTRO- Useless Doubts by novice students (बाबू-शोना /क�े �खला�ड़यों के फालतू प्र�)
1. 🎓🎓✋Why would bank borrow ₹₹ in TLTRO if so many conditions are imposed on it? Ans. maybe the
bank feels it will earn profit from such investment.
2. 🎓🎓✋Why would bank borrow ₹₹ in REPO rate (Short term) when TLTRO offering long term loans?
Ans. 1) depends on the requirement of the bank 2) TLTRO amount is finite e.g. first round total ₹1 lakh
given. So, if a banker came late to RBI’s shop and Jalebi stock was finished , it’ll have to buy Samosa. इतनी
सब पं चात िकधर यूपीएससी पूछती है, िक आप फालतू म� व� और िदमाग खचर् कर रहे ह�?
3. 🎓🎓✋ How does TLTRO involve “flight of foreign investors & its impact on exchange rate & bond yield”
etc.? Ans. Such long-winded-financial-cause-effect = no importance in UPSC, even though private mock-
test-walla design useless MCQs from it. इतनी दू र क� बीरबल क� �खचड़ी अपने को पकाने क� ज�रत नहीं है!
4. 🎓🎓✋I want to do PHD on this until Taimur grows up & gets married. Ans. Good luck! You keep doing
that, but, I’m finished teaching this topic here. #🕰🕰थोड़ा-पढ़ो-आगे-बढ़ो
12.13.6 🐯🐯🐯🐯🐯🐯🐯🐯 RBI’s special or flexible liquidity window to help MF
Franklin Templeton Mutual Fund (MF) decided to stop / windup some MF schemes in India, because they
couldnot generate good returns during the Corona crisis.
⇒ So, its Fund manager will liquidate (=sell off) the securities → return ₹₹ to investors.
⇒ Investors panicked because
o Fund manager did not give clear timelines about money refund.
o even if Fund manager tries to sell off shares/bonds, it is difficult to find buyers at the right price
so MF-investors may lose money.
o Alleged financial scam angle. (क�थत �व�ीय घोटाला)
⇒ RBI reform? Special or flexible liquidity window to help Mutual Funds
o From this window, banks borrow from RBI → Bank uses it to either
 Give loans to Mutual Fund or
 Use the ₹₹ to buy debt-securities from Mutual Fund
😲😲✋ What is the total amount of funds in this special window? What is the tenure of loans
here? Do banks need to pledge G-Sec to borrow? How much interest is charged? Ans. Low profile
technical reform to a crisis affecting a small segment of financial market. # 🎓🎓Boycott-PHD
12.13.7 🐯🐯🐯🐯🐯🐯 MonPolicy → Quant Tools → Rates → MSF (2011)

- Marginal Standing Facility (MSF: सीमांत �ायी सु�वधा) is the Interest rate at which RBI lends short-term
loans to Scheduled Commercial Banks (SCB) with their SLR-quota G-Sec as collaterals.
- MSF higher than Repo Rate. MSF = Repo% + 0.25%
12.13.8 MonPolicy → Quant Tools → ® Rates- associated terms
- ↔ Policy Corridor (मौ�द्रक नी�त ग�लयारा): It’s the width among MSF-Repo-Reverse Repo. Refer to reverse
repo rate shortnote for more. इन सब उपकरणों के बीच क� चौड़ाई
- Window Operations: LAF-MSF “windows” are operated through RBI’s E-Kuber Core Banking Solution
(CBS) platform.
- (Uncollateralized) Standing Deposit Facility (SDF, �ायी जमा सु�वधा): Banks parks funds in RBI for short-
term to earn interest. No G-sec / collateral, unlike Reverse Repo. This helps RBI absorb excess liquidity
for short term in situations like demonetization when RBI may not have enough G-Secs to pledge as
collaterals. Urjit Patel Committee on Monetary policy (2013) proposed this, Budget-2018 agreed to
amend RBI Act for this. But not yet implemented.
- Tri-Party Repo (�त्र-प�ीय पुन: क्रय-अनुबंध): In ordinary repo, there are two parties- borrower vs. lender (RBI).
In Tri-party Repo, there are 3 parties 1) borrowers 2) lenders 3) Tri-Party Agent (e.g. NSE or BSE) who,
acts as an intermediary between the two parties to facilitate collateral custody, payment and guaranteed
settlement. 2017: RBI issued guidelines → 2018: National Stock Exchange (NSE) started it, 2019: Bombay
Stock Exchange (BSE) started it. This is not a tool of Monetary Policy. It is meant to help Corporate
companies to borrow money from the market.
- BPLR, MCLR, External Benchmarks, Teaser Loans etc: Terms related to how individual banks decide
their lending rates to borrowers. Ref: 📑📑Pillar1B2- NPA
- Liquidity Trap: To be covered separately in 📑📑Pillar-4Z: Microeconomics.
12.13.9 🐯🐯🐯🐯📁📁 Market Operations (OMO, MSS): (Inflation → Sell G-Sec, Deflation → Buy)
Figure 7: Aloo Lelo, Pyaaz Lelo, G-Sec Lelo...

I. Open Market Operations (खुले बाजार क� िक्रयाए): RBI buys and sells Union & State Govts’ securities to
control money supply.
o RBI buying= Money supply increased/liquidity injected in the market.
o RBI selling = Money supply decreased/liquidity absorbed from the market.
II. Market Stabilization Scheme (बाजार ��रीकरण योजना): RBI sells special type of G-sec, T-Bill & Cash
Management Bills (CMB) to suck excess liquidity. ✋How it works? How is it similar or different
than OMO? Ans. NOTIMP. Very low profile thing for scope of UPSC. #🕰🕰थोड़ा-पढ़ो-आगे-बढ़ो
III. Sterilization / Forex Swap: Their primary objective is to control the currency exchange rate volatility
(e.g. $1=₹65,70,80…). <More in 📑📑Pillar#3 >
IV. Operation Twist (2019): a special type of OMO. Explained in next segment.
🔠🔠❓ MCQ. 'Open Market Operations' refers to: (Prelims-2013)

a) borrowing by banks from the RBI b) lending by commercial banks to industry and trade
c) purchase and sale of government securities by the RBI d) None of the above
🔠🔠❓ MCQ. Which of the following would result in an increase in money supply in economy? (UPSC-Pre-2012)
1. Purchase of G-Sec from the public by the Central Bank.
2. Deposit of currency in commercial banks by the public.
3. Borrowing by the government from the Central Bank.
4. Sale of government securities to the public by the Central Bank.
Answer Codes: (a) 1 only (b) 2 and 4 only (c) 1 and 3 (d) 2, 3 and 4
🔠🔠❓ MCQ. Which of them is/are part of Monetary Policy? (Pre-2015)
1) Bank rate 2) Open market operations
3) Public debt 4) Public Revenue
Answer Codes: (a) 1 only (b) 2, 3 and 4 (c) 1 and 2 (d) 1, 3 and 4
12.14🐯🐯📢📢🗃🗃🧬🧬MONPOLICY: QUANTITATIVE TOOLS → OPERATION TWIST

Before that, you’ve to be aware of some many basic concepts:
12.14.1 🔪🔪🔪🔪: Security → Debt → G-Sec & Bonds (ऋण के �लए जारी क� गई प्र�तभू�तयां)
A ‘Security’ means a certificate/document indicating that its holder is eligible to receive a certain amount of
money at a particular time. This could be a…
Table 4: प्र�तभू�तयों के �व�भ� प्रकार
Borrower 🦁🦁Govt 🤵🤵Corporate (�नगम)
Short term Treasury bills, Cash Management Bill of Exchange, Commercial Papers,
(less than 1 year) → bills Promissory Notes.
Long term G-Sec, Sovereign Bonds Bonds / Debentures
(1 year/>) →
Usually lower than Corporates’ Depends on following factors →
Interest rate
because risk is low
12.14.2 🔪🔪🔪🔪:🤵🤵Corporate Bonds: factors that determine its interest rate
If companies want to borrow money, they may issue bonds to investors. e.g. “Whoever buys this Reliance Bond
worth ₹1000, we will pay him 9.40% interest rate per year and return the principal after 15 years.” Usually the
interest rate offered on such bonds depends on
Factor (कारक) How it determines corporate bond interest rate
(Risk) Credit rating of Lower credit rating (e.g. CCC or D) → higher interest rate needs to be offered
company because risk of default is high. जब िदवा�लयेपन का जो�खम �ादा हो
Inflation why/how: Ans. Ref: 📑📑Pillar1C → Inflation Indexed Bonds
Bank deposit interest Higher the (Bank) deposit interest rate, higher bond interest rate needs to be
rates offered to attract households to shift money from bank savings/FD to corporate
bonds. (अगर ब�क जमाकतार्ओ ं को अ�ा �ाज दे रहा है तो कं पनी ने �ादा �ाज ऑफर करना होगा)
Yield on G-Sec If G-Sec yield ⏫, then corporate will have to offer even higher bond interest
rate to attract the investors from G-Sec investment towards C-Bond investment.
12.14.3 🔪🔪🗃🗃: 🤑🤑 Bond Yield (बांड म� �नवेश करने पर होने वाली आय या मुनाफा)
⇒ Bond yield is the profit an investor earns on a bond investment.
⇒ Suppose, Government issues a G-Sec or Bond: 8% annual interest, tenure: 1 year
⇒ Bhide Master invests ₹ 100. So, upon 1 year maturity he’ll get ₹ 8 Interest + ₹ 100 Principal = ₹ 108. So
his profit or yield will be= 8%
⇒ But suppose, before maturity of 1 year, Bhide Master urgently needs cash. So he sells ₹ 100 face-value
bond to Jethalal at a discounted price of ₹90. पैसों क� अचानक ज�रत पड़ने पर स�े दाम म� िकसी को बेच दे
⇒ Jethalal keeps the it till maturity → Government pays him ₹ 108. प�रप� होने तक बेचे नहीं
⇒ So, for Jethalal the profit OR current bond yield to maturity is….
108−90
=�
𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑜𝑜𝑓𝑓 ₹ 90
� ∗ 100 = 20%
12.14.4 🔪🔪🔪🔪: 🤑🤑 Bond Yield ∝ 1/Price (स�े म� खरीदा तो मुनाफा �ादा)
⇒ Bhide bought @100, his yield is 8%; Jetha bought @90, his yield is 20%.
⇒ Thus, Bond yield is inversely related to the current selling price of the bond in the secondary market.
⇒ If a bond’s demand ⏫ → its selling price will ⏫ → bond yield ⏬ (Because of inverse relation)
12.14.5 🔪🔪🔪🔪: 🤑🤑 Bond yield: other factors affecting it (अ� कारक)
⇒ If the economy is booming (तेजी), companies are making great profit, investors may sell bonds at lower
prices in a hurry to unlock their money to invest it in shares of companies, because they think it’ll get
them more dividend. Then bond’s current selling price in the secondary market ⏬ → yield ⏫.
⇒ If the economy is facing recession (Continuous decline in growth rate: मं दी) → companies will NOT make
great profit → investors sell shares, and prefer to buy bonds hoping they’ll get secured fixed interest.
Then bond’s demand ⏫ in the secondary market → selling price ⏫ → yield ⏬.
12.14.6 🐯🐯🐯🐯🐯🐯🐯🐯Operation Twist: why?
⇒ Commercial banks were reluctant to lend money to private sector companies because of the problem of
Bad Loans /Non-Performing assets (NPA: More in 📑📑Pillar1B2). िदवा�लयेपन क� घटनाओं के चलते ब�क वाले �नजी
�ेत्र क� कं प�नयों को कजर् देने से डर रहे थे। आ�थक वृ�द्ध और रोजगार सृजन के �लए यह अ�� बात नहीं थी
⇒ If such companies could borrow money by issuing corporate bonds (at cheaper interest rate) → more
factories, more jobs, more production, more GDP.
⇒ RBI decided to attack the third factor: “If the yield on long term G-Sec decreased, then automatically
Corporate Bond interest rates could also decrease.”
Figure 8: figures are only for illustration. No need to memorize

12.14.7 🐯🐯🐯🐯🐯🐯🐯🐯RBI’s Operation Twist: methodology (2019-Dec)
Since RBI’s existing monetary policy tools had failed to make loans cheaper for corporates / boost the
economy. So in 2019-Dec, RBI started a “special OMO” wherein:
RBI Sold→ shorter -term G-Sec (of 1 year & higher tenor) worth ₹10,000 crore
RBI Mrunal bought longer -term G-Sec (of 10-14 years tenor) worth ₹10,000 crore (i.e. equal
Bought → amount as above, so as to keep money supply unchanged.)
⇒ Since RBI started buying long-term G-Sec, their demand will ⏫ → price will ⏫ → yield is ⏬. The
10YearGSec’s yield lowered from 6.75% to 6.60%
⇒ And we’ve already learned, Corporate bonds are priced (benchmarked) keeping G-sec yields in mind.
So, Op Twist → Lower G-Sec yield means →
 Cheaper borrowing for Private sector Companies. Because
o They can borrow money by issuing their (long term) C-Bonds at much cheaper interest rate
than before.
o When a private company meets a bank manager to borrow money, it can negotiate the loan
price, “If your bank does not lend me money at this cheaper interest% then I will issue my own
corporate bonds.” → Even the bank lending rates for corporate loans could be reduced.
 Cheaper borrowing for Government. For reasons similar to above.
 Investor of long term G-Sec will feel discouraged to hold the G-Sec till maturity (10-14 years), He will try
to sell it to another party/RBI and pull out his money, then he may park ₹₹ it a Corporate Bond /
Bungalow / car / Goa-vacation etc. Thus, it helps boost the consumption → economy grows.
समज म� आ गया हो तो ब�ढ़या है, नहीं तो रट्टा मारो �जंदाबाद (if not understood then memorize by Rot-learning)
1. 1961: "Operation Twist" was first used by the US Federal Reserve.
2. 2019: RBI used also done it. Officially called “Special Open Market Operation (OMO: खास िक� क� खुले बाजार
क� िक्रया) wherein the Central bank simultaneously buys and sells G-sec of varying maturities to adjust their
yields. Which helps reduce interest rates on corporate bonds/debentures → easier to mobilize
investment → factory expansion → jobs, GDP growth. (अगल अलग �मयादी क� सरकारी प्र�तभू�तयाँ खरीद-व-बेच कर
�रजवर् ब�क उनक� उपज को कम करता है, तािक कॉप�रेट कं प�नया स�े �ाज मे पैसा बाजार से हा�सल कर सके , तािक रोजगार और आ�थक वृ�द्ध
मे मदद �मले)
3. Objectives of Op-Twist=
a. To make borrowing cheaper for Companies and Govt. कं पनीओ/�नगमों और सरकार के �लए कजर् स�ा करवाना
b. It was NOT MEANT For fighting inflation. महंगाई से लड़ना इसका उद्दे� नहीं है
4. It ensures better Monetary Policy transmission for economic growth. (because, earlier, simply reducing
the repo rate has not helped much in making loans cheaper, for corporates. इससे पहले रेपो दर कम करने पर भी
बाजार म� लोन स�े नहीं हो रहे थे)
5. Net liquidity remains unchanged because ₹10,000 crore goes in and the same amount comes out of the
market. सकल तरलता म� कोई बदलाव नहीं �ोंिक �जतना खरीदा, उतना ही बेचा है
✋🎓🎓 🚫🚫 Beyond this, further PHD on what/why/how = poor cost:benefit for MCQs.For example “The
simultaneous sale of short-term bonds, on the other hand, helps push up short-term rates which had fallen
below RBI's benchmark rate. This would not only correct the anomaly in the short- and long-term rates ” ….
All this is not important for the scope of competitive exams, even if inexperienced private mock-test-quiz-
masters ask it. We need not loose sleep over each and every column.
12.14.8 ✋🎓🎓 🔪🔪🔪🔪: 🤑🤑 Bond Yield & Inverted Yield Curve: Concepts with poor cost-benefit for exam
1. Inverted Yield curve
2. Negative Bond Yield
✋🎓🎓🎓🎓 very poor cost-benefit chasing these topics. Irrespective of how many times theHindu columnists
write about it and how many private mock test-walla make faaltu MCQs from it. #🕰🕰थोड़ा-पढ़ो-आगे-बढ़ो
12.15🐯🐯🐯🐯🌽🌽 MONETARY POLICY: QUALITATIVE TOOLS (गुणा�क साधन)
⇒ Quantitative tools (SLR, CRR, Repo etc.) control the ‘volume’ of loans. कज� क� मात्रा को तय करते ह�
⇒ Whereas, qualitative tools (PSL,LTV etc.) control the “distribution” of loans to a particular sector of
economy. गुणा�क साधन कज� के �वतरण को तय करते ह�
- (e.g. agriculture) or particular segment of society (e.g. farmers, women, SC/ST).
⇒ Hence, qualitative tools also known as SELECTIVE (चयना�क) or DIRECT (प्र��) Tools.
12.15.1 � Moral Suasion (नै�तक दबाव / सलाह) & Publicity (प्रचार)
Figure 9: म�ने तो अपनी repo-दर कम कर दी लेिकन ये लालची ब�क वाले अपने loan-दर कम नही कर रहे , कम से कम मेरा �लहाज/स�ान रखने के �लए भी उ�े थोड़ा तो स�ा
करना चािहए।
- Moral suasion meaning applying “Persuasion” without applying punitive measures. RBI governor tries
this tactic via conferences, informal meetings, letters, seminars etc
- Example, RBI-Governor asking banks to transmit repo-rate cuts, open new branches in rural areas,
spread financial literacy, give loans to farmers beyond PSL quota etc. Similarly, RBI Governor requesting
CM or Finance Minister to control fiscal deficit & subsidy leakage to enhance the efficacy (प्रभावका�रता) of
RBI’s monetary policy.
- Publicity: RBI governor could give media statement, speech during university convocation (दी�ांत पदवीदान
समारोह), memorial lectures… “Look I reduced repo rate but banks are not passing the benefit to
customers…and xyz”. By doing so, he can create an effective public opinion which also pressurizes the
banks to stop their thuggery.
12.15.2 �🚯🚯 Direct Action (सीधी कायर्वाही: �ोिक लातो के भुत बातो से नहीं मानते)
- RBI can punish banks (and even non-banks) for not complying with its directives under RBI Act, Banking
Regulation Act, Payment and Settlement Systems Act, Prevention of Money Laundering Act (PMLA),
Foreign Exchange Management Act (FEMA). �रजवर् ब�क के िदशा �नद�शों का पालन न करने पर �व�भ� कानूनों म� सजा/दंड
- 2019: RBI ordered the banks to have a “Clawback (लौटना)” provision in their CEO & Top executives’
salaries. E.g. If the CEO did any scam/fraud, he’ll have to return his previously paid salary / bonus, even if
he had retired/left the job afterwards. (िकसी ब�क का सीईओ कांड म� पकड़ा गया तो पुरानी तन�ाह भी लौटानी होगी.)
12.15.3 💍💍 Margin Requirements / Loan to Value (LTV) (सीमा अ�नवायर्ता)
Figure 10: जब घर मे पड़ा है सोना, िफर काहे को रोना?

⇒ RBI can mandate Loan to Value (LTV) for a gold-loan, home loan, auto loan or business loan etc. so a
Bank/NBFC can’t lend more than x% of the value of the collaterals. RBI can change this x% to boost /
curb demand. (�गरवे रखी चीज के मू� के सामने ब�क या गैर-ब�क सं �ान �� को िकतना कजर् दे सकते है? �रजवर् ब�क उसके मानदंड म�
बदलाव द्वारा, बाजार म� चीज-व�ुओ क� मांग को बढ़ा या कम कर सकता है)
LTV reforms in 2020-Aug Before After
Gold Loan 75% value of gold/gold-jewellary 90%
🤩🤩Benefit? More quantity of loan by pledging same quantity of gold → 😷😷 post-corona-economic-revival.
12.15.4 Selective Credit Control (चयना�क ऋण �नयं त्रण)
In a negative / restrictive direction (नकारा�क) In a positive direction (सकारा�क �दशा म�)
- Credit Rationing System: English (in 18th - 🚗🚗 Consumer credit control e.g. During
century) and USSR (till 1990s)– their central deflation / recession, RBI can relax the down
bank will not give more than “X” amount as payment / EMI installment norms for durables
loan to individual banks. And an individual
In a negative / restrictive direction (नकारा�क) In a positive direction (सकारा�क �दशा म�)
can’t get more than prescribed amount of loans like Vehicles, TV, Fridge etc. to boost
for each category (housing, education, consumption and demand.
business). - Priority Sector Lending <see below> प्राथ�मक �ेत्र
- 1960s: Credit Authorization Scheme (CAS) in के ऋण मानक
India: all commercial banks had to obtain prior
approval of the RBI before loaning ₹ 1 crore/>
to a single borrower.
- 1970s: RBI imposed quantitative ceiling on
non-food loans to boost green revolution, food
inflation.
But such measures failed due to lax monitoring and
loopholes. (�श�थल �नगरानी के चलते बेअसर रहे)
12.16 🐯🐯🐯🐯🐯🐯 PRIORITY SECTOR LENDING (PSL: प्राथ�मकता �ेत्र के �लए ऋण मानक)
Figure 11: थोड़ा लोन हमको भी िदलवा दो Governor-sahib!

⇒ 1968: First time RBI used the word “priority sector”: Banks must give 40% of their loans to 3 priority
sectors 1) agriculture 2) small industries 3) exporters by 1985. (कृ �ष छोटे उद्योग और �नयार्तक)
⇒ Over the years, more sectors were included in it. (समय रहते और भी �ेत्रों को इसम� शा�मल िकया गया)
⇒ 2015: some reforms in PSL. → 2019: RBI's UK Sinha Committee on MSME loan reforms and a few Other
committees had suggested the reforms in the PSL.
⇒ 2020-Sept: RBI reformed PSL guidelines as following:
Priority Sector Loans norms → minimum quota after 2020-Sept Reforms BEFORE AFTER
� Weaker Sections (कमजोर वगर्): 10 % ⏫12%*
⇒ SC, ST, Women, PH, Minorities, Manual scavengers, Artisans,
⇒ PM-Jan DhanYojana Overdrafts upto Rs.10k,
⇒ Beneficiaries of Govt's National Rural/Urban Livelihood Mission Schemes
(NRLM/NULM: More in 📑📑Pill#6: HRD →Poverty Removal Schemes)
🌽🌽 Agriculture (कृ �ष) (all farmers: small and big) 10% 8%
🌽🌽 Agriculture: सीमांत िकसान और छोटे िकसान 8% ⏫10%*
⇒ Marginal Farmer (owns upto 1hectre land) सीमांत िकसान
⇒ Small farmer (>1 upto 2ht) छोटे िकसान
🧵🧵 Micro Enterprises (अ�त लघु उद्योग), Khadi-Village industries 7.50% 7.50%
Above categories (Weaker section, agriculture, micro-enterprise ) 4.50% 2.50%
plus, other categories such as
⇒ Small & Medium Enterprises, Affordable housing loans to beneficiaries under
Pradhan Mantri Awas Yojana
⇒ food processing companies, Vermi compost, biofertilizer, seed production,
⇒ Exporters, Student-Education loans (upto Rs.10l),
⇒ Social Infrastructure (schools, health care, drinking water, sanitation facilities);
⇒ Renewable Energy Projects (wind mills, biomass generators, solar street light,
micro-hydel plants etc.) etc.
Total PSL for Indian Scheduled Commercial Banks and 40% 40%
(Foreign Banks with 20 or more branches).
* These quota⏫ is implemented in Phase Wise manner by 2023-24. (क्र�मक �प से लागू होंग)े
🤩🤩Benefit? It will ⏫ loan-availability for the weaker section and small farmers thus helping in the United
Nations' Sustainable Development Goals related to poverty removal. (📑📑Ref: HDT-Pillar#6) कमजोर वगर् और छोटे
िकसानों को �ादा मात्रा म� कजार् �मल पाएगा. गरीबी �नवारण, सं यु� रा�� के सतत �वकास ल�ों क� प्रा�� म� मदद करेगा.
⇒ PSL quotas are ‘minimum (�ूनतम/कम से कम)’ & not maximum. So, if bank wishes, it can EVEN give even
60% of its loans to weaker sections, instead of just 12% “minimum quota” meant for weaker section.
⇒ Bank’s Loans given to Non-Banking Financial Company (NBFC: गेरब�क �व�ीय कं पनी) who are lending to
above PSL categories = such ‘indirect loan’ to PSL sectors will also be counted for bank’s quota. (परो� �प से
दी लोन भी �गन ली जाती है। )
⇒ Bank + NBFC’s joint lending / co-lending/ co-origination loans to PSL categories are also eligible, with
certain caveats but #PHD-NOT-IMP. (ब�क और गेर-ब�क का साथ मे �मलकर पीएसएल �ेत्र को कजर् िदया, तो उसमे ब�क ने िदया
कजर् इस �ोटे म� �गन �लया जाता है, कु छ शत� के आधीन)
12.16.1 🐯🐯🐯🐯🐯🐯 PSL Reforms-2020: on RRB/SFB/UCB?
What is the difference/meaning of SCB/RRB/SFB/UCB etc? Ans: (📑📑Ref: HDT-Pillar#1B1: classification)
Type of Bank & PSL Reforms-2020: Before After
Indian Scheduled Commercial Banks (SCB: अनुस�ू चत वा�ण��क ब�क) and 40% same 40%
Foreign Banks in India with 20 or more branches
Foreign Bank in India with <20 branches (�वदेशी ब�क) 40% same 40%
Regional Rural Banks (RRB: �ेत्रीय ग्रामीण ब�क) 75% same 75%
Small Finance Banks (SFB: लघु �व� ब�क) 75% same 75%
Urban Cooperative Banks (UCB: शहरी सहकारी ब�क)* 40% ⏫75%
Rural Cooperative Banks (ग्रामीण सहकारी ब�क) N/A N/A
⇒ *These quota⏫ is implemented in Phase Wise manner. So, It will become fully effective in 2023-24.
⇒ Internal quotas may be different e.g. RRBs: Weaker section =15%. But, poor cost-benefit in chasing all
that information. #⏳📚📚थोड़ा-पढ़ो-आगे-बढ़ो
12.16.2 🐯🐯🐯🐯🐯🐯 PSL Reforms-2020: Startups, Renewable Energy and Healthcare
PSL Loans → other category BEFORE AFTER
Startup Company is a company: only eligible categories: All types of Startups
⇒ Age: Not older than 10 years ⇒ Agro/Food processing related allowed in PSL quota
AND Startup
⇒ Annual turnover: Not more ⇒ MSME Startup For loans upto ₹50cr
than ₹100 cr AND [then What is MSME? (📑📑Ref: HDT-
⇒ Function: innovation in Pillar#1D and #4B)]
goods/services. (नवाचार)
(📑📑Ref: HDT-Pillar#4B)
🔌🔌🔌🔌 Renewable energy(अ�य ऊजार्) only loans upto 15cr eligible ⏫30cr
💊💊 Healthcare project/Hospital? 5cr ⏫10cr
12.16.3 🐯🐯🐯🐯🐯🐯 PSL Reforms-2020: Weightage to poor districts (गरीब/�पछड़े �जलों को भारांक)
RBI will classify the districts based on previous PSL loans given by all banks:
Type of district if Axis bank gives ₹100 PSL loan in this district → RBI
will count Axis’s quota-fulfillment as _ _ .
Low Credit penetration e.g. Tawang, ₹125 (आरबीआई ने एक ऐसी भारांक प्रणाली बनाइ है �जसमे ब�क �पछड़े
Dantewada etc. जहां भूतकाल म� ब�क-कजर् क� प�ँ च कम �जलों म� लोन देकर ब�त आसानी से अपना पीएसएल ल�ं क हा�सल कर
रही है सकती है।)
High Credit penetration e.g. Ahmedabad, ₹90 (तािक ब�क जो पहले से स�� जले है, उसे �ादा स�� बनाने क� जगह
Pune etc. जहाँ पहले से ही काफ� कजार् िदया जा चूका है �पछड़े �जले पर �ान दे)
⇒ Thus, RBI’s PSL weightage system will passively discourage banks from giving more PSL-loans to the
developed districts and it will encourage banks to give PSL-loans to backward districts. This will help in
more balanced regional development. �ेत्रीय �प से सं तु�लत �वकास म� यह कदम फायदेमंद होगा.
🔠🔠❓ Priority Sector Lending by banks in India constitutes loans to _ _ _ _ . (UPSC-Pre-2013)
a) Agriculture b) Micro and Small Enterprises c) Weaker Sections d) All of the above
12.16.4 🐯🐯🐯🐯🐯🐯:📜📜 Priority Sector Lending Certificates (PSLC) from 2016 onwards
Figure 12: भाई आ�मर/Rancho हमने अपना assignment नही िकया, तू अपना "EXTRA-walla" हमे बेच दे!
⇒ In this arrangement, the overachieving Banks can sell their excess PSL in form of ‘certificates’ to
underachieving banks without transferring the loan assets or its risk. (ल�ं कों से �ादा उपल�� हांसील करने वाली
ब�क, अ� ज�रतमं द ब�क को स�टिफके ट बेचती)
⇒ Four kinds of PSLCs traded through RBI’s E-Kuber Portal, viz., Agriculture (PSLC-A); Small and
Marginal Farmers (PSLC-SM); Micro Enterprises (PSLC-ME); and General (PSLC-G). ✋But, their
internal difference/Operational details notIMP4Exam.
If an underachiever bank can’t fulfil its PSL-quota through PSL-certificates purchase then ultimately,
⇒ Underachiever bank will have to deposit PSL-shortfall money to NABARD's Rural Infrastructure
Development Fund (RIDF), SIDBI, National Housing Bank (NHB), MUDRA Ltd. etc as per the norms
decided by RBI from time to time. (ल�ं कों को हा�सल नहीं कर पाने वाली ब�क ने आरबीआई द्वारा �च��त अलग-अलग सं �ाओं म�
पैसा �नवेश करना पड़ेगा)
⇒ Underachiever bank will earn interest from such deposited money, but it’ll be (usually) linked with Bank-
Rate & their money will be locked-in a long-term project. वह पैसा लं बे समय तक अटक जाएगा
🔠🔠❓ Which of the following is not an instrument of Selective Credit Control? Pre-1995
a) Regulation of consumer credit b) Rationing of credit
c) Margin requirements d) Cash reserve ratio
🔠🔠❓ An increase in the Bank Rate generally indicates that _ _ _ (Pre-2013)

a) Market rate of interest is likely to fall.
b) Central Bank is no longer making loans to commercial banks.
c) Central Bank is following an easy money policy.
d) Central Bank is following a tight money policy.
🔠🔠❓ If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do ? (UPSC-
Prelims-2020)
1. Cut and optimize the Statutory Liquidity Ratio
2. Increase the Marginal Standing Facility Rate
3. Cut the Bank Rate and Repo Rate
Answer Codes: [a) 1 and 2 only [b) 2 only [c) 1 and 3 only [d) 1, 2 and 3
12.17📢📢 � MONETARY POLICY TOOLS: A READY RECKONER TABLE

Tools & Strategy? <2%CPI= Fight deflation (अप��त) >6%CPI= Fight Inflation (मुद्रा��त)
⇒ Deflation: ↑ money supply, Easy, Cheap, Dovish, Expansionary Tight, Dear, Hawkish,
inject liquidity=> make policy. Contractionary
आसान-स�ा �ाजदरे, �व�ारवादी तं ग- मँ हगी �ाजदरे, सं कु चनवादी
loans cheaper, ↑
consumption
⇒ Inflation: Do reverse
Reserves: CRR, SLR ↓ (Decrease) ↑ (increase)
Quantitative
Key Rates (Repo, MSF, ↓ (Decrease) ↑ (increase)

Bank Rate)
Market Ops OMO: RBI Buys G-Sec from OMO: RBI Sells G-Sec
(OMO) market.
Moral Suasion / Direct Nudge / Force the banks to enforce To enforce the Hawkish policy
Action Dovish Policy
Margin Req. / Loan to Increase e.g. inverse
Value (LTV) Gold-LTV: 60% → 90%
Qualitative Tools
↑ loan-flow to sectors that can - ↓the loan-flow to sectors

generate employment e.g. textile where speculative
→workers buying more →demand investment is leading to
Selective Credit Control
/consumption increased →deflation demand-side inflation e.g.
/ Priority Sector
fought. real estate & housing.
Lending (PSL)
- ↑loan-flow to sectors where
loans can ↑supply e.g. onion
farmers.
** MCQs are usually confined to how can CRR,SLR,Repo & OMO be used for inflation /
deflation control. For rest of the tools you need not waste time thinking 500-jaat-ke-permutation-
combination & PhD.
12.18📢📢 MONETARY POLICY IN PRESENT-DAY INDIA

There are 3 strategies / ways of making a monetary policy:

1. 💸💸 Exchange rate stability (�व�नमय दर ��रता): Singapore & other export-oriented economies use this. They
want to keep their local currency at certain rate against US-dollar to boost exports. (How? Ans Pillar#3)
2. 🎳🎳 Multiple Indicators (एका�धक सं के तक): Central Bank tries to focus on Economic Growth, Employment,
Inflation Control and Exchange rate stabilization. India's RBI followed this strategy upto 2016.
3. 🧄🧄 Inflation targeting / Price Stability (मुद्रा��त ल�ीकरण): Central Bank only aims to keep inflation
controlled, THEN other indicators (growth, employment, exchange rate) will automatically fall in line.
Model successful in Western nations → RBI’s Urjit Patel Committee Report (2013-14) recommended it
for India → adopted from 2016-Oct, by amending RBI Act Section 45 →
12.18.1 📢📢 Monetary Policy Making under RBI Act since 2016
Figure 13: जाने �ा होगा रामा रे.....

Table 5: composition of the ⚖� statutory Monetary Policy Committee (MPC: वैधा�नक मौिद्रक नी�त स�म�त):
🐯🐯 RBI side (3 members) 🦁🦁 Govt. Side (3 members)
1. RBI Governor, as the Ex-officio Chairman. 1. Dr. Shashanka Bhide from National
2. Dy.Governor responsible for Monetary Policy. Michael Council for Applied Economic
Patra (from 2020-Jan). Earlier Viral Acharya. Research (NCAER, Delhi)
3. One person nominated by RBI Central Board: Mridul 2. Dr. Ashima Goyal from Indira Gandhi
Saggar (Executive Director, RBI). Institute of Development Research
(Mumbai)
3. Dr. Jayanth R Varma from IIM-A
Their tenure tied with their ex-officio job tenure (पदेन कायर्काल) E.g. Tenure: 4 years, no re-appointment. (पुन:�नयु��
Shaktikanta’s shakti (powers) will be gone after his 3-years tenure असं भव)
as RBI-Governor expires, unless he is reappointed.
🐯🐯 RBI side (3 members) 🦁🦁 Govt. Side (3 members)
RBI Governor & Dy.Gov are selected by Financial Sector They’re selected by Search-cum-Selection
Regulatory Appointment Search Committee (FSRASC) is headed Committee headed by Cabinet Secretary (IAS)
by Cabinet Secretary (IAS)
- Meeting quorum 4 persons, incl. Governor. (कायर्साधक सं �ा: कम से कम चार लोगों क� हाजरी ज�री)
- Legally required to hold minimum four meetings in a year. (कानूनी �प से सालाना कम से कम 4 बार �मलना ज�री)
- In practice, they meet every two months to decide bi-monthly monetary policy updates. (Although
during 😷😷Corona-lockdown met more frequently).
- Repo rate(=Policy rate= benchmark interest rate: decided by Majority vote. (मौिद्रक नी�त दर ब�मत से तय होगा)
- When they vote for the first time, all members, including the Governor, will vote. If tie → Governor can
vote again for second time as casting vote (यिद मतों म� बराबरी �ई तो गु�ी सुलझाने के �लए �नणार्यक मत).
- To ensure transparency / accountability (पारद�शता / जवाबदेही):
o Govt can send message only in writing.
o Committee must publish its minutes of the meeting on the 14th day, and “Monetary Policy
report” at every 6 months.
- Inflation target decided by Union Government, after consulting with RBI Governor. (महंगाई �नयं त्रण का ल�
सरकार तय करेगी गवनर्र से �वमशर् करने के बाद)
o Present target: Keep Consumer Price Index (CPI:All India) within 2-6% for 2016-2020 (ending
at 31/03/2021). [alt. way of saying: 4% +/- spread of 2%]
o Target fail: if inflation not kept in this 2-6% zone for 3 consecutive quarters (=9 months) then
Committee must send report to Govt with reasons and remedies (ल� मे असफलता के कारण और उपचार
क� �रपोटर् भेजनी होगी).
Asked in UPSC-Pre-2015 Asked in UPSC-Pre-2017
🔠🔠❓ With reference to inflation in India, find 🔠🔠❓ Consider following statements about
correct statement: Monetary Policy Committee:
a) Controlling the inflation in India is the 1. It decides RBI’s benchmark interest rates.
responsibility of the Government of India only 2. It is a 12-member body including the Governor
b) The Reserve Bank of India has no role in of RBI and is reconstituted every year.
controlling the inflation 3. It functions under the chairmanship of the
c) Decreased money circulation helps in Union Finance Minister.
controlling the inflation Find Correct Statements:
d) Increased money circulation helps in (a) 1 only (b) 1 and 2 only
controlling the inflation (c) 3 only (d) 2 and 3 only
12.19📢📢 REVIEW OF MONETARY POLICIES
Monetary Policy Committee decides only Repo rate. Other decisions, such as CRR-SLR cut, PSL norms,
banning magnetic-chip cards etc are decided separately alone by RBI Governor. However, after the meeting,
he’ll make all these announcements together, in the Press conference.
🔠🔠❓ MCQ. The Reserve Bank of India’s recent directives relating to ‘Storage of Payment System Data’,
popularly known as data diktat command the payment system providers that : (Prelims-2019)
1) They shall ensure entire data relating to their payment systems are stored in a system only in India.
2) They shall ensure that the systems are owned and operated by public sector enterprises.
3) They shall submit the consolidated system audit report to the comptroller and Auditor General of India
by the end of the calendar year.
Find Correct Statement(s): codes: (a) 1 only (b)1 and 2 only (c) 3 only (d) 1,2 and 3 only
Ans. After April-2018’s monetary policy RBI governor announced certain regulatory reforms. One of them was :-
Payment System data must be stored in India within next 6 months, to ensure its safety against misuse /
Russian-Chinese-hackers. So, for Prelims-2019, this was D-1 year current affairs. Now we are targeting 2021, so
need not put so much efforts behind 2018’s current affairs.
📢📢 Policy Decisions & Regulatory Announcements
[we will study in appropriate pillars/sections, so DONOT LOSE SLEEP YET]
Dec- - Urjit’s last policy: No change in Repo; Stance: Calibrated Tightening.
2018 - While Crude oil prices have declined by ~30% since October, so higher inflation is unlikely.
But RBI wants to keep inflation @4 per cent on a durable basis. So, “calibrated tightening”
stance continued.
- Loan rate external benchmarks WEF 1/1/2019.
- RBI to reduce SLR, from 19.5% to 18% in a phased-manner.
- RBI's own Ombudsman for digital transactions- he'll look into not just banks but all
payment service providers. (📑📑Ref: 1A1)
- RBI to setup Ex-SEBI Chairman U K Sinha’s Committee on long-term solutions for loans to
MSME sector. (📑📑Ref:4B)
Feb- - Shakti’s 1st Policy: CPI falling towards 2%, so to prevent deflation, Repo cut by 25 basis
2019 points BPS (6.50% → 6.25%),
- Decision was not unanimous. (�नणर्य एकमत नही था) Dy.Gov Viral Acharya voted against
reducing repo, saying our previous stance in dec-meeting was “Calibrated Tightening” so
it’ll be wrong.
- But, majority voting favored to cut repo rate, stance changed to “neutral”.
- Collateral free loans to farmers: limit raised from ₹1l to ₹1.6lakhs
Apr- - Repo cut 25bps (6.25% → 6.00%), stance kept at Neutral.
2019 - Decision not unanimous. Dy. Gov. Viral Acharya fears inflation due to Oil & El Nino. But,
Gov.Shaktikanta Das feels the declined sale of vehicles, air & sea traffic is pointing to
deflationary trend ahead, so rate cut necessary.
- Loan interest rates: External Benchmark mechanism was to be implemented from 1/4/2019
but decision deferred after bankers’ feedback.
Jun- - Repo Cut 25bps (6.00% → 5.75%), Consequently, the reverse repo rate @5.50%. MSF and
2019 Bank Rate @6%
- Stance: changed from Neutral to accommodative = next time Committee may decrease the
repo rate or keep it unchanged, but, no chances of rate hike.
- Committee voted unanimously for rate cut because, IMD has predicted 96% normal
monsoon, so high level of food inflation seems unlikely. Fuel prices rose but overall
inflation is offset by falling of other commodities prices. Thus, CPI inflation remained
unchanged at around 3%. Slowdown in trade and manufacturing due to US-China trade
war, and other geopolitical issues. So cheaper loans required to boost demand and mfg.
measures to promote digital economy
- RBI waives NEFT & RTGS charges. Banks will be required, in turn, to pass these benefits to
their customers.
Aug- - Repo cut 35 bps (5.75-0.35=5.40); accommodative stance.
2019 - RBI’s National Electronic Funds National Electronic Funds Transfer (NEFT) will function
24/7 basis on all days, from 2019-December.
- Banks lending to NBFC (who is lending to agro,MSME, housing etc PSL sectors) will be
counted under Bank’s PSL quota achievement.
- External Loan Benchmark from 1/10/2019.
Oct- - Repo cut 25bps (5.40-0.25=5.15); accommodative stance.
2019 measures to promote digital economy
- We shall identify one district per State/UT, & develop it as 100% digital payment enabled
district.
- Large sized Prepaid Payment Instrument (PPI) companies such as Amazon Pay, Mobikwick
etc. will be required to setup Internal Ombudsman (आंत�रक �शकायत �नवारण अ�धकारी) to reduce
workload of RBI’s digital ombudsman.
Dec- - No changes in Repo Rate or Stance. (5.15% accommodative stance)
2019 - heavy unseasonal rains → onions & other vegetables supply disrupted → price rise.
- Pulses’ area under cultivation is declining → supply declining → price rise.
- Milk became more expensive due to rise in fodder prices.
- 13 states’ Electricity distribution companies (DISCOMs) have ⏫ Electricity prices.
- So, if repo reduced → inflation problem may worsen.
- At the same time, the economy is facing slowdown, sales are down so, if repo increased →
slowdown may worsen. So, the MPC Committee unanimously (एकमत होकर) decided to keep
repo unchanged.
- Regulatory updates related: Urban Co-operative Banks (UCB), Small Finance Banks, Semi-
closed PPI etc. in respective pillars.
Feb- - No changes in Repo Rate or Stance because of reasons similar to Dec-2019.
2020 - CPI Inflation rose to 7.4% in December-2019 (which is outside the statutory limit of 2-6%)
& this inflation rate is highest since 2014-July. So, ideally, RBI should have ⏫repo rate to
combat inflation but
o 1) December-2019 policy had kept Accommodative stance = repo couldn’t be
increased. It could only be kept same/reduced.
o 2) Union Budget-2020 announced various measures to boost economic growth so
Committee preferred to wait & watch how those measures impact inflation and
growth, before changing repo rate.
RBI announces Measures to promote economic growth::
1. LTRO: Long Term Repo Operations (LTROs) of 1 yr & 3 yr.
2. CRR Exemption based on (new) loans given for 1) automobiles, 2) residential housing and
3) MSMEs
RBI announces measures to promote digital economy
1. Regional Rural Banks (RRBs) will be allowed to operate as ‘merchant Acquiring Banks’, in
other words, they can also tie up with card companies directly. (Ref: 1A1).
2. RBI to construct a “Digital Payments Index” (DPI) to capture the growth of digital
payments across India.
March - Given below as a separate sub-topic for Corona
toApril
12.20🐯🐯🐯🐯🐯🐯RBI’S MONETARY POLICIES: CORONA MARCHTOAPRIL’20

By default, RBI’s MPC Committee supposed to meet every 2-2 months. So, After February’s meeting, they
should hold next meetings in April. But in Corona crisis economic slowdown they met more frequently. कोरोना
महामारी के चलते आए आ�थक सं कट से �नपटने के �लए स�म�त ने तय समय से पहेले एका�धक मीिटंग का आयोजन िकया:
2020-March, ⇒ Due to Corona outbreak, RBI held the meeting sooner in the last week of March-2020,
last week instead of April.
2020-April, ⇒ As we learned, MPC Committee only has one task- decide repo rate. All other
17th measures like CRR cut etc depend solely on RBI Governor’s discretion. These
measures don’t require MPC Voting or approval.
⇒ So, in 2020-April, RBI governor (को सपना आ जाता है और वो) holds press conference
announcing some additional measures to revive economy against Corona.
2020-May ⇒ As per bi-monthly (2-2- months) pattern, this meeting was planned in 2020-June but
was advanced to May due to Corona
The gist of above March-April-May announcements are as following (and they’re considered to be part of
👻👻ATMANIRBHAR BHARAT, which we’ll learn in Pillar#2D and #4C):
12.20.1 👻👻ATMANIRBHAR → Gist of RBI’s March2April 2020 Announcements:
⇒ ⏬CRR to 3% and ⏬Repo to 4%.
⇒ Policy corridor changed, to ⏬Reverse repo rate. #SBI-telemarketing4loans
⇒ 🐯🐯🔪🔪🔪🔪🔪🔪:Targeted Long Term Repo Operations (TLTRO: ल��त दीघर्का�लक रेपो) → RBI gives loans to
banks with condition that banks must invest it in “X” places to help Corporates & NBFCs. (Ref the full
short note in earlier part of this handout.)
⇒ 🐯🐯🔪🔪🔪🔪🔪🔪 RBI’s special or flexible liquidity window to help Mutual fund companies.
👻👻ATMANI → Reforms by RBI in Mar-Apr-May-2020 We’ll learn in Pillar#
🐯🐯🐯🐯🐯🐯✋ Loan/EMI/NPA relief / Moratorium (ऋण अदायगी पर रोक) 📑📑1B2: NPA
🐯🐯🐯🐯🐯🐯🐯🐯 Special Refinance Facility for AIFI (All India Financial 📑📑1B1: classification of Banks
Institutions). खास िक� क� पुन�वत योजना, अ�खल भारतीय �व�ीय सं �ानो के �लए → AIFI (NABARD, SIDBI,
EXIM, NHB)
RBI defers BASEL Norms, IndAS accounting Norms, orders bank to 📑📑1B2: BASEL norms
pause/halt the Dividend Distribution
🐯🐯🐯🐯🐯👨👨: RBI reforms Ways and Means advances (WMA) and 📑📑1C: SEBI/Sharemarket: Short
Consolidated Sinking Fund (CSF) term Debt instruments
RBI reforms 📑📑3A: Balance of Payment
Voluntary Retention Route (VRR: �ै��क अवधारण मागर्) (BoP): FDI, FPI
Fully Accessible Route (FAR: स�ूणर्त: सुग� मागर्)
12.20.2 🐯🐯🐯🐯🐯🐯RBI’s Monetary Policies: 2020-August
⇒ 2020-May- last meeting (Which was originally scheduled in the month of June)
⇒ 2020-Aug: meeting held.
⇒ Repo unchanged @4% so Automatically MSF@4.25 and RR@3.35%. Stance: Accommodative
⇒ No changes in repo because
o ⏫ food inflation due to i) corona-lockdown supply chain disruptions and ii) heavy rains.
o So as per the theory RBI should ⏫ the repo rate to combat food inflation.
o But, expensive loans → post-corona economic-revival will be harmed. So, no changes in Repo.
⇒ Announced to conduct more rounds of Op.Twist, to help Govt & Companies to borrow at a cheaper rate.
⇒ CRR: technical reforms i) Automated sweep-in and sweep-out (ASISO) facility. ii) Flexible Automated
Option for Managing CRR Balances.
⇒ Gold Loan LTV: Before 75% → AFTER 90%. benefit? More quantity of loan can be taken by pledging
same quantity of gold → post-corona economic-revival.
⇒ Priority Sector Lending (PSL) reforms: 1) ⏫quota for weaker section, small-marginal farmers. 2) Made
all types of Startups eligible for PSL loans. 3) Extra weightage to give PSL-loans in poor districts.
⇒ RBI Committee under KV Kamath submitted report on how to restructure loans impacted by the Covid
19 pandemic. "We'll take reforms accordingly".
⇒ RBI to loan ₹75,000cr to All India Financial Institutions (AIFIs: NABARD, SIDBI,EXIM,NHB) → post-
corona economic-revival. (📑📑Ref: HDT-Pillar#1B1- classification of Banks and NBFCs)
⇒ Less Cash Economy / Digital Payment / Fraud Prevention: (1) Scheme of Offline Retail Payments Using
Cards and Mobile Devices (2) Online Dispute Resolution (ODR) for Digital Payments (3) Positive Pay
Mechanism for Cheques. (📑📑Ref: HDT-Pillar#1A1)
⇒ We'll create a Reserve Bank Innovation Hub for research in cyber security, digital payment etc. साइबर सुर�ा,
िड�जटल भुगतान इ�ािद म� सं शोधन/नवाचार के �लए �रजवर् ब�क म� एक नवाचार क� द्र बनाएं गे
12.20.3 🐯🐯🐯🐯🐯🐯RBI’s Monetary Policies: 2020-October
Repo unchanged @4% so Automatically MSF@4.25 and RR@3.35%. Stance: Accommodative. Because
⇒ CPI inflation >6.5% in July-August 2020. This is beyond the statutory 2-6% limit. So, ideally RBI should
⏫the repo rate to combat inflation, but that will make the loans expensive and harm the post-corona
economic revival. so the RBI kept the repo rate unchanged. (महंगाई से लड़ने के �लए अगर लोन महंगे कर िदए तो
कोरोनावायरस के प�ात भारतीय अथर्तंत्र को पुनज��वत करना मु��ल होगा इस�लए �रजवर् ब�क के दरों म� कोई बदलाव नहीं िकया गया)
⇒ Besides, the present inflation is caused by supply-side problems due to lockdown. Once the unlockdown
progresses → supply ⏫ → inflation ⏬. so changes in the repo rate not required at present. (तालबं धी हटने
प�ात वैसे भी बाजार म� चीज व�ुओ ं क� आपू�त बढ़ेगी तो अपनेआप महंगाई काबू म� आ जाएगी.)
⇒ TLTRO: another round announced
⇒ Less Cash Economy / Digital Payment: (1) RTGS made 24/7 (2) perpetual license. (📑📑Ref: Pillar#1A1)
12.20.4 Monetary Policy: 2020-December
⇒ RBI is required to control the inflation within 2 to 6% of CPI all India. Inflation @7.6%(Oct), So in theory
repo⏫ required, but corona-slowdown = RBI does not want the loans to become more expensive. So
repo rate unchanged at 4%. Stance accommodative. हालांिक महंगाई �नयं त्रण के �लए रेपो दर को बढ़ाना ज�री है िकंतु कोरोना
के बाद अथर्�व�ा को पुनज��वत करने के �लए स�े लोन मुहैया कराना भी उतना ही ज�री! इस�लए रेपो दर म� कोई बदलाव नहीं.
⇒ Banks prohibited from paying dividend to shareholders from their profits (So as to build buffer against
the Corona loan defaults) ब�कों ने अपने मुनाफे म� से शेयरधारकों को लाभांश �वतरण करने पर रोक
12.20.5 Monetary Policy: Feb-2021 update
Repo unchanged @4% so Automatically MSF@4.25 and RR@3.35%. Stance: Accommodative. Because
⇒ 1) Food inflation is normalizing with arrival / supply of winter fruits & vegetables, but fuel inflation is
worrisome. So can't ⏬ Repo. खाद्य पदाथर् तो स�े होने लगे िकंतु लेिकन इं धन के चलते महंगाई अभी भी �ाई �प से काबू म� नहीं
⇒ 2) GDP growth yet to fully revived → so cant ⏫ Repo [else Expensive loans= =⏬demand →⏬GDP
growth].
⇒ CRR: During CORONA-2020, CRR was reduced from 4% to 3% (2020-March till 2021-March). now
moving towards economic recovery, enough loanable funds available so, Restoration/⏫ of CRR in two
phases: 3.5% (2021: March2May ) →4% (2021-May)
⇒ 😰😰BEFORE: RBI appointed 3 types of ombudsman for consumer complaints: (i) Banking Ombudsman
Scheme (ii) NBFC Ombudsman (iii) Digital Transaction Ombudsman. 🤩🤩After: Integrate these 3 into a
One Nation One Ombudsman / Integrated Ombudsman Scheme (एक�कृ त �शकायत �नवारण अ�धकारी योजना)
⇒ 😰😰BEFORE: Retail investors Indirectly invested in G-sec via Mutual funds, stock exchanges. 🤩🤩AFTER:
Retail Investors can directly Open "Gilt Securities Accounts Retail Direct" with RBI's E-Kuber core
banking solution (CBS) platform. 🤩🤩Benefits: [1) Deepening of the g-sec market (सरकारी प्र�तभू�तयों के बाजार
क� जड़ों को गहरा करेगा) [2) New investment opportunities for aam-aadmi. (�नवेश के नए अवसर) (More in Pillar1C:
SEBI share market)
12.20.6 ✋🚫🚫 Monetary Policy bi-monthly announcements: ignored
After the MPC Committee decides repo rate, the RBI governor also announces some regulatory
announcements by himself. But, I’ve ignored many technical announcements due to their poor cost:benefit
for “general studies of economy” such as सब तकनीक� िदशा�नद�श अपनी परी�ा म� काम के नहीं. फालतू म� व� बबार्द मत करो।
- CRR ASISO guidelines| Borrowing limits under Marginal Standing Facility as a % of NDTL
- (1) SLR holding reforms (2) banks and NBFCs: co-lending for PSL loans (3) Export Data Processing and
Monitoring System (EDPMS), the ‘Caution / De-caution Listing’ of exporters for Authorised Dealer (AD)
- Guidelines for Foreign Exchange Trading Platform for Retail Participants developed by Clearing
Corporation of India.
- new committees to review systemically important Core Investment Companies (CICs).
- Technical guidelines for retail investors to participate in State G-Sec auctions.
- Basel-III standards- Leverage Ratio guidelines: 4% for Domestic Systemically Important Banks (DSIBs)
and 3.5% for other banks.
- Will implement recommendations of Usha Thorat Task Force on Offshore Rupee Markets.
- Updated norms for non-interest-bearing Special Non-resident Rupee (SNRR) Account.
- And so many other things.#🕰🕰थोड़ा-पढ़ो-आगे-बढ़ो
12.21🔪🔪🔪🏠🏠🏠🏠 BANKS’ LENDING RATES % (ब�क ऋण क� �ाज दर�)
Figure 14: Sir, अब से आपको ये लोन, इतने प्र�तशत �ाज मे पड़ेगी।

RBI’s 6-member statutory MPC decides policy rate (=repo rate) to keep inflation within 2-6%CPI (All India)
but who decides lending rates of individual banks, & how? Ans:
Govt began nationalization of private banks, and ‘administered interest rates’ (प्रशा�सत �ाज दर�) on
1969
them i.e. Govt would decide how much loan interest rate the banks should charge on borrowers?
M.Narsimham suggested deregulation: Govt should not dictate / administer individual banks’
1991
interest rates. RBI should only give methodology to banks. (सरकार ने अपने मनमाने �ाज दर थोपने नहीं चािहए)
2003 RBI introduced Benchmark Prime Lending Rate (BPLR) system
- RBI introduced BASE Rate + Spread system;
- update frequency on individual banks’ discretion (अपनी मज�/ �ववेकाधीन). So, it did not help
2010
transmission of monetary policy much. EvenIF RBI reduced repo rate, the banks would not
update their formula figures regularly. �रजवर् ब�क ने अपनी �रपो दर कम करी िकंतु ब�कोने लोन स�े नहीं िकए😰😰
12.21.1 🔪🔪🔪🏠🏠🏠🏠 Bank’s loan interest rate: MCLR system(2016)
- In 2016, RBI ordered banks to link their loan interest rate = “Marginal Cost of Funds based Lending Rate
(MCLR) + Spread” system.
- Banks to calculate on monthly basis. Its formula consists of CRR Cost, Operating Cost, Marginal cost of
funds (Repo Rate, Deposit Interest) etc. what is the meaning of these things, how they work? ANS.
✋NOTIMP for exam. #🕰🕰थोड़ा-पढ़ो-आगे-बढ़ो
- 🤩🤩Benefits? Better transmission of Monetary Policy; transparency & accountability to borrowers.
- 😰😰Limitation? From January to Oct 2019, RBI has reduced its repo rate by 135 bps but banks reduced
their loan interest rates by merely 40-47 bps. Thus, even though the RBI reduces its repo rate, banks are
not quickly reducing their loan interest rates. (�रजवर् ब�क ने अपनी �रपो दर कम करी िकंतु ब�कोने लोन स�े नहीं िकए)
12.21.2 🔪🔪🔪🏠🏠🏠🏠 Bank’s loan interest rate: External Benchmark (बाहरी ब�चमाकर् )
⇒ MCLR’s #EPICFAIL ultimately forced RBI to order following from 1st October 2019.
⇒ Banks must link their loan interest rates with “External Benchmark + Spread + Risk premium” system.
⇒ Banks must feed the latest data of external benchmark in above formula, atleast once every three months.
⇒ 🤩🤩🤩🤩External Benchmark Benefits? Ans = Same benefits which MCLR couldn’t fully deliver.
Individual bank free to pick any one External External Benchmark system is applicable to the
Benchmark such as new loans given to….
1) RBI repo rate or 1. Personal loans (taken for any sudden
2) 91-day T-bill yield or emergency expenditure)
3) 182-day T-bill yield or 2. Retails loans (home, vehicle, electronics etc)
4) any other benchmarks by Financial 3. Loans to micro & small enterprises
Benchmarks India Ltd. 4. Loans medium enterprises (this 4th category is
to be added from 1/April/2020).
5. It is applicable to old/previous loans in above
categories, if borrower fills the application
form.
Related topic: Fixed vs Floating interest loans, teaser loans, NPA etc. 📑📑Pillar1B-2: burning issues → NPA
12.21.3 😷😷Corona-2020 impact on Deposits interest rate & Loans interest rate as per 📔📔📔📔ES21
Deposits ⇒ Initial months of lockdown the growth of deposit⏬⏬ because people withdrew
amount money in panic. Although in the later months → Unlock down and normalcy →
बचत म� आने ⏫⏫Quantity of deposit तालाबं दी के शु�आती महीनों म� लोगों ने एह�तयाती कारणों से ब�कों से अपनी िडपॉ�जट
वाली रा�श �नकाली हालांिक प�र��त सामा� होने पर, बाद के महीनों म� वापस बचत क� मात्रा म� बढ़ोतरी होने लगी है
Deposit ⇒ ⏬⏬ The saving deposit rates = 3.25-3.5% in 2019 but 2.7-3.0% in 2021.Reason:
interest ⇒ RBI has reduced repo rate, and also provided long term loans in TLTRO so, banks are not
बचत �ाज so greatly desperate to acquire the raw material (i.e. money) from deposits. �रजवर् ब�क से
दर दीघार्व�ध के �रपोटर् लोन �मलने के चलते ब�कों को िडपॉ�जट कतार्ओ ं क� �ादा ज�रत महसूस नहीं �ई इस�लए उनको बजट
का पैसा ब�कों म� जमा करने के �लए लुभाने के �लए �ादा बचत �ाज दर% जारी करने क� भी ज�रत महसूस नहीं �ई
⇒ 2) ⏬Loan demand So cannot offer high level of returns to depositors. कोरोना क� मं दी ब�कों का
लोन देने का काम वैसे भी धीमा हो गया इस�लए वह िडपा�जट कतार्ओ ं को, उनक� बचत पर अ�ा �ाज दर% नहीं दे पाए
Loan ⇒ ⏬ due to ⏬in repo rate in the External benchmark system लोन �ाज दर स�े �ए ऐसा आ�थक
interest सव��ण का कहना है
12.22🔇🔇 LIMITATIONS OF MONETARY POLICY IN INDIA (मयार्दाए)
Figure 15: मै काम तो कर रहा �ँ , लेिकन उसक� सकारा�क असर, अथर्�व�ा पर िदख नही रही। 😢😢
Even though the monetary policy is updated every 2 months, its efficacy in controlling inflation or boosting
growth is restricted by following factors: (�न� कारणो के चलते, मौिद्रक-नी�त मं हगाई-�नयं त्रण और आ�थक वृध्धीमे असरकारकता नही
िदखा पायी:)
1) Western countries’ households → consumerist lifestyle → don’t save large amount of money in Banks.
So their banks borrow more quantum of money from US Federal reserve and European Central Bank
respectively. Whereas in India, Repo is not major source of funds for Indian banks, due to higher level of
savings & deposits. (पा�ा� देशो मे उपभो�ावादी जीवनशैली. जबिक भारतीयो मे ब�क-बचत क� भावना के चलते हमारे ब�कों के �लए
आरबीआई के रेपों लोन, पैसो का मु�य �ोत नहीं है। अंत: �रपो दर स�े होने पर भारतीय ब�को को खास फरक नहीं पड़ता। )
2) Before the External Benchmark System: Indian Banks did not immediately pass on the RBI rate cuts to
customers, citing NPA/Bad loans / profitability problem. According to RBI’s own research, it took
minimum 6-12 months for repo rate cut to benefit end-customers and it took about 24 months for repo
rate changes to impact inflation. (बाहरी-ब�चमाकर् से पहेले के समय मे,भारतीय ब�क तुरंत अपने �ाजदर कम नही करते थे।)
3) Poor management in Public Sector Banks (PSB), scams in the private sector banks, large level of Non-
Performing Assets (NPA) also stymie the impact of monetary policy. (सावर्ज�नक �ेत्र के ब�कों म� बेअसर प्रबं धन, �नजी
�ेत्र के ब�कों म� घोटाले, अनजर्क प�रसं प��या) More in 📑📑Pill1B2
4) Supply Side Issues: El-Nino/Poor monsoon hurting crop production → food inflation; Wars &
Geopolitical issues ⏫ global crude oil & raw material prices, protectionism by China-US denting our
exports. RBI can’t control them. (कम बा�रश + म�पूवर् क� भूराजनी�तक तनाव= भारत मे क�े माल क� आपू�त को असर करते है,
चीन-अमरीका का सं र�णवाद भारतीय �नयार्तमे बाधा डालता है। इ�े �नयं त्रण मे रखना आरबीआई के �लए मु��ल।) 📑📑Pill3&4A
5) While cheap loans can boost consumption, investment and growth but because of poor-monsoon-fear
and oil-price fear, RBI (during Raghuram Rajan and Urjit Patel’s governorships) was usually
apprehensive of inflation and more inclined to keep repo rate high. Then RBI was get criticized for not
facilitating cheap loans & economic growth because of its ‘Hawkish policy’. (महंगाई-�नयं त्रण के च�र मे कभी कभी
खुद �रजवर् के मं हगे �रपो-�ाजदारों ने अथर्त� को आगे बढ्ने से रोका है।)
6) Government Side Issues: Fiscal deficit, Subsidy leakage, Populist Loan-waivers etc. (राजकोषीय खाध, सब�सडी
का �रसाव, लोकलुभावन के �लए िकसानो क� ऋण-माफ�) 📑📑 Pill#2D → FRBM Act
7) Structural Issues in Economy: lack of Ease of Doing Biz, electricity-road infrastructure = production
/supply affecting inflation trends. (�ापारमे सुगमता क� कमी, �बजली-सड़क क� अवसं रचना आिद बु�नयादी मसलो के चलते
उ�ादन/आपू�त क� कमी। �रजवर् ब�क जादू क� छड़ी चलाकर इसे दु�� नहीं कर सकता) 📑📑More in Pill4B&5
8) Presence of Informal moneylenders in rural areas who circulate black money at exorbitant interest rates.
Poor penetration of banking sector, lack of financial inclusion, cash-intensive rural economy etc.
(�ाजखोर/सा�कार जो कालाधन ऊंचे �ाज पर घुमाते है, सभी गरीबो के �व�ीय समोवेशन क� कमी, नगदी मुद्रा पर �ादा आधीन है हमारी
ग्रामीण अथर्�व�ा। �रजवर् ब�क अपनी रेपो दर कम भी कर�, इधर कु छ फकर् नहीं पड़ता) 📑📑More in Pill1D
12.22.1 ✍Conclusion / �न�षर्
⇒ Monetary policy plays an important role in price stability, economic growth, job creation and social
justice in any economy. But, its efficacy is low for Indian economy, because of the aforementioned issues.
(उ� कारणो के वतर्मानमे मौिद्रक नी�त मं हगाई �नयं त्रण, आ�थक वृ�द्ध, रोजगार सृजन, सामा�जक �ाय म� मह�पूणर् भू�मका नही अदा कर पाती)
⇒ However, both RBI and Government of India have been making attempts to address it through various
reforms for fixing the bad loan/NPA problem in banking sector, developing the infrastructure &
promoting the ease of doing business, financial inclusion and less-cash economy. (अनजर्क प�रसं प�तया, बु�नयादी
अवसं रचना, �ापार म� सुगमता, �व�ीय समोवेशन, कम-नगदी वाली अथर्�व�ा के �लए �रजवर् ब�क व सरकार ने कदम उठाए है। )
⇒ In the upcoming time, these reforms will help improving the impact of Monetary policy in India's
economic growth and human development. (इन सुधार/कदमो के चलते भ�व� मे आ�थक- वृ�द्ध, मानव �वकास मे मौिद्रक नी�त
का असर अव� बढ़ेगा)
12.22.2 �🎺🎺🌞🌞1⃣✋ Mock Questions for UPSC Mains/GSM3 (250 words)
1) "Monetary policy is both a catalyst and an impediment to India's growth story." Examine critically. “भारत
क� �वकास-गाथा म� मौिद्रक नी�त एक उद्दीपक भी है और एक अवरोधक भी है।" इस कथन क� समी�ा क��जए।
2) “Monetary policy is a useful medicine, but NOT panacea for economic growth”. Comment in context of
India. “आ�थक �वकास के �लए, मौिद्रक नी�त एक उपयोगी दवा है, लेिकन रामबाण नहीं”.
3) Discuss the significance of Monetary policy in India's economic growth and human development. भारत क�
आ�थक वृ�द्ध और मानव �वकास म� मौिद्रक नी�त के मह� पर चचार् कर�.
4) Give an account of the steps undertaken by RBI to revive the Indian economy from Corona pandemic.
कोरोना महामारी से भारतीय अथर्�व�ा को पुनज��वत करने के �लए आरबीआई द्वारा उठाए गए कदमो का �ववरण दी�जए।
5) Enumerate the steps taken by the RBI under the Atma Nirbhar Bharat initiative in 2020.
आ��नभर्र भारत अ�भयान के अंतगर्त आरबीआई द्वारा उठाए गए कदमो क� सूची दी�जए।
📑📑NEXT HDT: Pillar1B1- Classification of Banks and NBFCs

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12.14 🐯🐯🐯🐯🐯🐯🐯🐯MonPolicy: Quantitative Tools → Operation Twist .............................................. 46