RBI's Monetary Policy Committee Meets as Markets Expect the First Rate Hike Since 2023
The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) began a three-day meeting on 5 October 2026. Its decision is due on Wednesday, 7 October.
The repo rate (the rate at which the RBI lends to banks) has stayed at 5.25% for four meetings in a row. The RBI had cut it by a total of 125 basis points (1.25 percentage points) during 2025.
Most market watchers now expect a 25 basis point hike to 5.50%. This would be the first increase since February 2023. Some banks expect one or two more hikes later in 2026-27, taking the rate to 5.75% to 6%.
The reasons cited are rising inflation risks, high crude oil prices (Brent crude around US$101 a barrel), a recent rate hike by the US Federal Reserve, and fast growth in broad money (M3).
One bank research report expects retail (CPI) inflation to cross 6.5% in the coming months before falling below 6% in early 2027. This is above the RBI's 2% to 6% tolerance band.
At its August meeting, the MPC kept the repo rate at 5.25% and its stance "neutral". The Standing Deposit Facility (SDF) rate was 5%, and the Marginal Standing Facility (MSF) rate and Bank Rate were 5.5%.
Monetary Policy Committee (MPC): How RBI Sets the Repo Rate
The Monetary Policy Committee (MPC) is a six-member committee that decides India's main interest rate, the repo rate. When the MPC raises this rate, loans slowly become costlier across the country, which cools spending and helps bring prices down. When it cuts the rate, loans become cheaper and the economy speeds up. Its legal job is to keep retail inflation close to a target fixed by the government, while keeping growth in mind.
The MPC must now decide whether rising inflation risks justify turning from cuts to a hike. If CPI inflation crosses 6% and stays there, it would breach the upper end of the band, which is why many expect the MPC to raise the repo rate and possibly change its stance.
Liquidity Adjustment Facility (LAF): The RBI's Interest Rate Corridor
The Liquidity Adjustment Facility (LAF) is the set of daily tools the RBI uses to add money to the banking system or take extra money out of it. Banks short of money borrow from the RBI; banks with extra money park it with the RBI. The rates for these two windows form a "corridor", and short-term market interest rates move inside it. The repo rate sits in the middle.
A repo rate hike would lift the whole corridor by 25 basis points. That means banks would pay more for overnight money and earn more when they park money with the RBI, and this higher cost would slowly pass on to home loans, car loans and business loans.
Money Supply Measures in India: M0, M1, M2 and M3
Money supply is the total amount of money available in an economy at a given time. It is not just the notes and coins in people's pockets. It also includes the money people keep in bank accounts, because they can spend it easily. The RBI measures money supply in layers, from the narrowest (only the most spendable money) to the broadest (including long-term deposits). These layers are called monetary aggregates, and the main ones in India are M0, M1, M2 and M3.
One reason analysts expect the MPC to raise the repo rate is that broad money (M3) has been growing faster than its usual trend. Fast M3 growth means more money is chasing goods, which can push inflation up, so it adds to the case for tighter monetary policy.
- MPC meeting: 5 to 7 October 2026; decision on 7 October
- Current repo rate: 5.25% (unchanged for four meetings); expected hike of 25 bps to 5.50%
- Repo rate cuts in 2025: total 125 bps (February 25, April 25, June 50, December 25)
- Last repo hike: 8 February 2023, to 6.50%
- SDF 5.00%; MSF and Bank Rate 5.50% (before the decision)
- Inflation target for 2026-31: 4% CPI, band 2% to 6% (notified 25 March 2026)
- Brent crude around US$101 per barrel
- Forecast: CPI inflation may cross 6.5% before easing below 6% in early 2027