1. Structure of the Indian Banking System
The Indian banking hierarchy is regulated by the Reserve Bank of India (RBI) under the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949. Banks are classified into Scheduled and Non-Scheduled entities based on whether they are included in the Second Schedule of the RBI Act 1934.
- Public Sector Banks (PSBs): State Bank of India (SBI) + 11 Nationalised Banks (Punjab National Bank, Bank of Baroda, Canara Bank, etc.).
- Private Sector Banks: HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank.
- Regional Rural Banks (RRBs): Established under RRB Act 1976 on the recommendation of the Narasimham Working Group. Shareholding: 50% Central Government, 15% State Government, 35% Sponsor Bank. First RRB: Prathama Bank (sponsored by Syndicate Bank).
- Small Finance Banks (SFBs): Recommended by Nachiket Mor committee (e.g. AU Small Finance Bank). Mandatory 75% Priority Sector Lending (PSL) quota; at least 50% loan portfolio must be under $25 Lakh.
- Payments Banks: (e.g. Airtel Payments Bank, India Post Payments Bank). Can accept demand deposits up to $2 Lakh per customer. Crucial rule: Cannot issue credit cards or make loans.
2. Flexible Inflation Targeting & The Monetary Policy Committee (MPC)
Following the Urjit Patel Committee recommendations, the RBI Act was amended in 2016 to introduce statutory Flexible Inflation Targeting (FIT):
Target Mandate: 4% ± 2% CPI Inflation
The statutory target is anchored to the Consumer Price Index (CPI-Combined) at 4.0% with a tolerance band of ±2% (2% minimum, 6% ceiling). If inflation remains outside this corridor for three consecutive quarters, the RBI must submit an explanatory failure report to Parliament detailing reasons and corrective remedies.
- Total 6 members: 3 from RBI (RBI Governor as ex-officio Chairperson, Deputy Governor in charge of monetary policy, and one RBI official) + 3 external eminent experts appointed by Central Government.
- Each member has one vote; the RBI Governor holds a second or casting vote in case of a tie.
- Must convene a minimum of four times per year.
- Policy Repo Rate: The interest rate at which RBI lends short-term liquidity to banks against collateral of government securities.
- Standing Deposit Facility (SDF): Absorbs excess banking liquidity without requiring collateral from RBI. Sets the floor of the LAF corridor.
- Marginal Standing Facility (MSF): Overnight penal borrowing window for commercial banks facing emergency liquidity stress.
3. Quantitative Liquidity Tools: CRR vs SLR
| Parameter | Cash Reserve Ratio (CRR) | Statutory Liquidity Ratio (SLR) |
|---|---|---|
| Governing Statute | Section 42(1) of RBI Act, 1934 | Section 24 of Banking Regulation Act, 1949 |
| Eligible Assets Form | Only Cash | Cash, Gold, and Approved Central/State G-Secs |
| Custody of Reserves | Maintained with The Reserve Bank of India | Maintained by The Bank Itself in its own vault |
| Interest Earned | Zero Interest Earned | Earns interest via government bond yields |