RBI May Raise the Repo Rate in October 2026: Inflation Risks, the MPC and the Liquidity Corridor Explained
The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) announces its decision on 7 October 2026. In a survey of 10 economists, nine expect a 25 basis point hike in the repo rate, from 5.25% to 5.50%. One expects no change.
If it happens, this will be the RBI's first rate hike since February 2023. All the economists expect the MPC to keep its stance "neutral", meaning it is not promising a long series of hikes.
The main reason is rising price risk. Retail (CPI) inflation rose to 4.8% in August 2026, a 22-month high and above the 4% target. A weak monsoon, high crude oil prices, a weaker rupee and rate hikes by other central banks, including the US Federal Reserve, are adding pressure.
Growth is strong, which gives the RBI room to focus on prices. GDP grew 7.8% in April-June 2026, above the RBI's forecast. In August, the RBI had projected FY27 growth at 6.7% and CPI inflation at 5%.
The banking system also has a large surplus of money. Inflows of about $143.6 billion between 8 June and 31 August 2026 (through foreign currency deposits and foreign borrowings) added to it. The RBI is draining this extra money using variable rate reverse repo (VRRR) auctions and sales of government bonds (open market operations).
Monetary Policy Committee (MPC): How RBI Sets the Repo Rate
The MPC is a six-member committee that decides India's main policy interest rate, the repo rate. When it raises the repo rate, borrowing slowly becomes costlier across the economy, which cools demand and price rise. When it cuts the rate, borrowing becomes cheaper and growth gets support. It was given legal status by amending the RBI Act, 1934 through the Finance Act, 2016.
The October 2026 meeting is expected to reverse the direction of rates for the first time since early 2023. Keeping the stance neutral while hiking would signal that the MPC wants to act on inflation now without tying its hands for the coming meetings.
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 target fixed by the central government, while also keeping growth in mind. "Flexible" means the RBI is allowed a band around the target and does not have to hit the exact number every month. The target is measured using the Consumer Price Index (CPI) combined, which tracks the prices of goods and services households buy.
August 2026 inflation of 4.8% is still inside the 2% to 6% band, but above the 4% target and rising. Under FIT, the MPC is expected to act early, before inflation moves towards the upper limit, which is why most economists expect a hike now.
Liquidity Adjustment Facility (LAF): The RBI's Interest Rate Corridor
The Liquidity Adjustment Facility, or 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 need cash every day to meet withdrawals and make payments. Some days they have too little, some days too much. Through the LAF, the RBI lends to banks that are short of money and takes deposits from banks that have extra money, at rates linked to the repo rate. This keeps short-term interest rates in the market close to the repo rate that the MPC has decided.
Banks currently hold a big surplus of money, partly because of large foreign currency inflows. If the MPC raises the repo rate to 5.50%, the SDF and MSF will rise to 5.25% and 5.75%, and the RBI will keep using VRRR auctions and bond sales so that the call rate actually rises with the repo rate. Without this liquidity work, a repo hike could stay only on paper.
- MPC decision date: 7 October 2026; 9 of 10 surveyed economists expect a 25 basis point hike to 5.50%
- Current repo rate: 5.25% (since December 2025); SDF 5.00%; MSF 5.50%
- First hike since February 2023, if delivered
- CPI inflation in August 2026: 4.8%, a 22-month high; target 4% (band 2% to 6%), fixed for April 2026 to March 2031
- RBI's August 2026 projections for FY27: CPI inflation 5%, GDP growth 6.7%
- GDP growth April-June 2026: 7.8%
- Last hiking cycle: May 2022 to February 2023, a total of 250 basis points
- Inflows of about $143.6 billion between 8 June and 31 August 2026 created surplus liquidity