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What is the RBI monetary policy?

In India, the monetary policy is announced by the RBI once every two months. It is one way the central bank controls the supply of money in the economy and the interest rates.

The objectives of the monetary policy are:

1. To maintain price stability at a reasonable level
2. To control the expansion of bank credit. To control essential stock, avoid over-stocking and idle money in the economy
3. To increase the efficiency in the financial system and ease operational procedures in the credit delivery system

Instruments for controlling the money flow in the system

In your journey to know all about debt funds, it will be useful for you to know some tools by which RBI controls the money flow in the system.

REPO and Reverse REPO

Repo rate is the benchmark rate at which banks borrow money from RBI for a specific period against the collateral of Treasury bills or Government securities. In case RBI reduces the repo rate, it helps the commercial banks access funds at a cheaper rate, while a hike in rates makes funds expensive for banks and, in turn, leads to higher lending rates by the banks.

While RBI borrows money from the commercial banks at the reverse repo rate, the increase in the reverse repo rate will make it attractive for banks to lend funds to RBI, leading to an indirect increase in the bank lending rates for individual corporates.

These benchmark rates are the primary measures for controlling inflation, as RBI will hike rates if inflation shows an increasing trend, reducing consumption demand by making loans for homes, cars, etc., more expensive. As the rates go up, the availability of credit and demand for goods in the economy decreases, resulting in a gradual lowering of inflation. RBI rate hikes are a symbol of the tightening of the monetary policy. On the contrary, RBI reducing rates is a signal of dovish or accommodative monetary policy.


CRR or Cash Reserve Ratio is the specified percentage of the banks' total deposit base, which must be placed with RBI while not fetching any interest.

CRR is an indirect method of controlling interest rates by reducing or increasing the quantum of funds available to banks for lending to their borrowers or investing in Government securities or T-bills.

For E.g., a hike in CRR should cause a hike in bank lending rates, while reducing CRR should decrease interest rates.


SLR or the statutory liquidity ratio is the specified percentage of the banks' total deposit base, which has to be invested in approved securities like Government securities or T-bills. SLR serves the dual purpose of ensuring adequate liquidity with the banks for paying depositors and is the indirect measure of controlling interest rates similar to CRR by reducing or increasing the quantum of funds available with banks for lending to their borrowers.


Open market operations (OMO) are the short-term or temporary measures of influencing interest rates and liquidity in the system. Suppose there is excess short-term liquidity in the system, the RBI will sell Government securities in the debt markets to absorb the liquidity. While if there is a deficiency, RBI will buy Government securities from the markets.

What does it mean for the average return on your debt mutual fund investments?

A debt mutual fund mainly invests in bonds issued by corporates and the Central & State Government. RBI may increase rates to curb inflation. This action controls consumption and reduces the demand for goods. When RBI reduces the benchmark rates, it will generally cause a fall in interest rates. So, the prices of existing bonds, issued at a higher coupon rate increase, as the new papers will be issued at the current lower interest rates. There is an inverse relationship between bond prices and interest rates. If the bond prices go up, the NAV of your debt fund may also increase. This is even more pronounced in the case of long-duration funds as the longer the tenure, the more sensitive is the bond price to movement in interest rates. This means the extent of capital appreciation may be more in longer-dated bonds. Sensitivity of NAV to interest rate changes is determined by its Modified duration.

However, always stay true to the investment's purpose and the reason for investing in debt in your portfolio. Avoid being swayed by a policy announcement to make drastic changes to your portfolio. You can continue to stay invested and reap the benefits of debt funds in the form of short-term debt funds, corporate bond funds for your short to medium needs, and gilt funds, or long-duration corporate bond funds for your long-term needs. The suitable debt fund to invest in is the one that align with your investment horizon and risk appetite.

Want to know more about the types of debt funds? Here

The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.

Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully

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