RBI holds policy rates while raising growth forecast; cuts inflation projections
The Reserve Bank of India's Monetary Policy Committee (MPC) kept the policy repo rate unchanged at 5.25% in its August 2026 review, maintaining a "neutral" policy stance.
The Standing Deposit Facility (SDF) rate was retained at 5.00%, consistent with the existing Liquidity Adjustment Facility (LAF) corridor.
The MPC raised its FY27 real GDP growth forecast to 6.7% (from 6.6% earlier), citing resilient domestic demand.
The MPC lowered its FY27 CPI inflation projection to 5.0% (from 5.1% earlier), noting that the recent uptick in headline inflation was driven mainly by food and fuel prices rather than a broad-based rise in prices.
The Monetary Policy Committee (MPC) and Flexible Inflation Targeting
The MPC is a six-member statutory body constituted under Section 45ZB of the Reserve Bank of India Act, 1934 (inserted by the Finance Act, 2016), tasked with determining the policy repo rate needed to keep inflation within a target set by the Government of India in consultation with the RBI. It comprises the RBI Governor (Chairperson), the Deputy Governor in charge of monetary policy, one RBI-nominated officer, and three external members appointed by the Central Government. Decisions are taken by majority vote, with the Governor holding a casting vote in case of a tie, and the committee is legally bound to explain itself if inflation breaches the target band for three consecutive quarters.
Key Details
- Flexible Inflation Targeting (FIT) framework: inflation target of 4% with a tolerance band of +/-2% (i.e., 2%-6%), notified for a five-year period and reviewable every five years by the Government in consultation with the RBI.
- MPC meets at least four times a year (in practice, bi-monthly — six times a year) and decisions are binding on the RBI.
- The RBI Act mandates a written report to the Government if the inflation target is missed for three consecutive quarters, explaining reasons and the remedial timeline.
The August 2026 review is a routine bi-monthly MPC meeting where the committee balanced an inflation print that had drifted above 4% (but was judged non-generalised, i.e., food/fuel driven) against continuing growth momentum — illustrating the FIT framework's core trade-off between price stability and growth support.
Monetary Policy Transmission — The LAF Corridor
Monetary policy transmission refers to how a change (or non-change) in the RBI's policy repo rate flows through to bank lending and deposit rates, and eventually to aggregate demand and inflation. The RBI operates this via the Liquidity Adjustment Facility (LAF), a corridor bounded by the Standing Deposit Facility (SDF) rate at the floor and the Marginal Standing Facility (MSF) rate at the ceiling, with the repo rate as the primary operative rate at the centre.
Key Details
- SDF (floor): the rate at which RBI accepts uncollateralised overnight deposits from banks, absorbing surplus liquidity. Introduced in April 2022, replacing the fixed reverse repo rate as the floor of the LAF corridor.
- MSF (ceiling): rate at which banks borrow overnight from RBI against government securities in emergencies.
- As of August 2026: repo rate 5.25%, SDF 5.00%, MSF 5.50% — a standard 25-bps symmetric corridor around the repo rate.
By holding the repo rate steady while flagging "greater clarity" needed on the inflation outlook, the MPC signalled a wait-and-watch stance rather than a directional change in the transmission mechanism — a "neutral" stance keeps future rate moves (up or down) open, unlike an "accommodative" or "withdrawal of accommodation" stance which signal a directional bias.
- Policy repo rate held at 5.25%; SDF at 5.00%; MSF at 5.50% (August 2026 review).
- Policy stance: Neutral.
- FY27 real GDP growth forecast: raised to 6.7% (from 6.6%).
- FY27 CPI inflation projection: lowered to 5.0% (from 5.1%).
- Inflation target under the FIT framework: 4% +/-2% (2%-6% band).
- MPC composition: 6 members — RBI Governor (Chair), Deputy Governor (Monetary Policy), 1 RBI-nominated officer, 3 government-appointed external members.