RBI Expected to Raise the Repo Rate to 5.50%: Why Oil Prices, a Weak Monsoon and US Rates Matter
The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) began its meeting on 5 October 2026. Its decision will be announced on 7 October.
In a poll of 21 economists and bank executives, 20 expect the MPC to raise the repo rate by 25 basis points (0.25 percentage points), from 5.25% to 5.50%. One expects no change.
The repo rate has stayed at 5.25% since December 2025, when it was cut by 25 basis points. The last increase was in February 2023, when it went up to 6.50%.
The main worry is inflation (rising prices). Brent crude oil crossed $100 a barrel in early September because of the West Asia conflict, reached about $113 on 9 September, and ended September near $103, well above the RBI's assumption of $85. A patchy monsoon has also hurt farm output.
Retail inflation was 4.45% in July and 4.82% in August 2026. Several economists expect it to cross the RBI's upper limit of 6% in the October-December quarter.
Other reasons for a hike: GDP grew 7.8% in April-June, stronger than expected, and the US Federal Reserve raised its rates in September 2026. The gap between Indian and US 10-year government bond yields has narrowed to about 189 basis points (7.21% vs 5.32%), its lowest in decades.
Monetary Policy Committee (MPC): How RBI Sets the Repo Rate
The MPC is a six-member committee that decides India's main interest rate, the repo rate. This is the rate at which the RBI lends short-term money to banks. When the MPC raises it, loans across the country slowly become costlier, people and businesses borrow and spend less, and price rise cools down. When it cuts the rate, the opposite happens.
The MPC now faces the opposite problem from 2025. If it raises the repo rate to 5.50%, the SDF would move to 5.25% and the MSF to 5.75%, and home and business loan rates linked to the repo rate would slowly rise. The aim would be to stop high oil and food prices from pushing overall inflation above the 6% limit.
Flexible Inflation Targeting (FIT) Framework
Flexible Inflation Targeting is the system under which the RBI's main job is to keep retail inflation close to a number fixed by the government. In India that target is 4%, measured by the Consumer Price Index (CPI), with a band of 2% to 6%. It is "flexible" because the RBI may also keep economic growth in mind while bringing inflation back to target.
Economists expect inflation to cross 6% in the October-December quarter. If it stays above 6% for three quarters in a row, the RBI will have failed its target again. An early rate hike is a way to prevent this, because interest rate changes take several months to affect prices.
Foreign Portfolio Investment (FPI): How Foreign Money Flows Into Indian Markets
Foreign Portfolio Investment is money that foreign investors put into Indian shares and bonds to earn a return, without trying to control the company. Because they can sell quickly, FPI money can come in fast and also leave fast. A key thing that moves it is the yield gap: the difference between what Indian bonds pay and what US bonds pay.
With US rates rising and the India-US 10-year yield gap at about 189 basis points, foreign investors earn less extra return for holding Indian bonds. If the RBI keeps its rate unchanged while the US raises, money could flow out, the rupee could weaken and oil imports could become even costlier. This is why many economists say the RBI must "respect" rising global rates.
- Expected repo rate: 5.50% (up 25 basis points from 5.25%); decision on 7 October 2026
- Poll: 20 of 21 economists expect a hike; 1 expects a hold
- Repo rate cut to 5.25% in December 2025; last hike in February 2023 (to 6.50%)
- Brent crude: about $91 average in August; about $113 on 9 September; about $103 at end-September; RBI's FY27 assumption $85
- CPI inflation: 4.45% (July 2026), 4.82% (August 2026); RBI forecast 5.9% for October-December 2026
- Inflation target: 4% (2%-6%), retained for 1 April 2026 to 31 March 2031
- GDP growth April-June 2026: 7.8%, 80 basis points above RBI forecast
- India-US 10-year yield gap: about 189 basis points (7.21% vs 5.32%)
- US Fed target range after September 2026 hike: 3.75%-4%