Banking & RBI — Advanced Topics

Monetary Policy Framework

Inflation Targeting

Since 2016, RBI operates Flexible Inflation Targeting (FIT) framework:

•Target: CPI inflation at 4% (tolerance band 2%–6%)

•Mandate: Price stability as primary objective, while keeping in mind growth

•MPC (Monetary Policy Committee): 6 members — 3 RBI (Governor + 2 deputies) + 3 Government nominees

•Voting: Simple majority (Governor has casting vote in tie)

•Meetings: 6 times per year (bi-monthly)

Transmission Mechanism

RBI changes Repo Rate
    ↓
Money market rates change (T-bills, call money, CP, CD)
    ↓
Bank deposit and lending rates adjust (MCLR, FD rates)
    ↓
Investment and consumption decisions change
    ↓
Aggregate demand and output change
    ↓
Inflation adjusts (with 3–6 month lag)

OMOs (Open Market Operations)

RBI buys/sells G-Secs in secondary market to inject/absorb liquidity:

•Buy G-Secs (OMO Purchase): Injects rupee liquidity → eases rates

•Sell G-Secs (OMO Sale): Absorbs liquidity → tightens rates

•Operation Twist: Buy long-term G-Secs + sell short-term simultaneously to flatten yield curve

Payment Systems

System	Amount	Settlement	Timing

|--------|--------|-----------|--------|

RTGS	₹2 lakh+	Real-time gross	24x7 (since Dec 2020)
NEFT	Any amount	Batch (hourly)	24x7
IMPS	Up to ₹5 lakh	Instant	24x7
UPI	Up to ₹1 lakh (₹5L for verified)	Near-instant	24x7
NACH	Any	Batch (T+1)	Business days
Cheque/MICR	Any	T+1 (CTS)	Business days

Financial Stability and Regulation

Systemically Important Banks (D-SIBs)

Banks deemed "too big to fail" requiring additional capital buffers. In India: SBI, HDFC Bank, ICICI Bank. Must maintain higher CET1 (Common Equity Tier 1) surcharge of 0.2%–0.8%.

Prompt Corrective Action (PCA) Triggers

Parameter	Threshold 1	Threshold 2	Threshold 3

|-----------|------------|------------|------------|

GNPA (%)	6–9%	9–12%	>12%
CET1 Ratio	6.162–7.75%	4.625–6.162%	<4.625%
Net NPA (%)	3–6%	6–9%	>9%
Leverage Ratio	3.5–4%	3–3.5%	<3%

Priority Sector Lending (PSL)

Banks must lend 40% of Adjusted Net Bank Credit (ANBC) to priority sectors:

•Agriculture: 18% (8% to small/marginal farmers)

•Micro enterprises: 7.5%

•Weaker sections: 12%

•Overall PSL: 40% for domestic banks, 32% for foreign banks

Shortfall: Banks must deposit in RIDF (Rural Infrastructure Development Fund) at lower interest rate.

Banking & RBI Deep Dive — Advanced