RBI Raises the Repo Rate to 5.50%: Higher Growth Forecast, Higher Inflation Worry
The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) raised the repo rate by 25 basis points (0.25 percentage points), from 5.25% to 5.50%. The decision was unanimous.
This is the RBI's first rate hike since February 2023. The MPC had kept the rate unchanged at 5.25% at its August 2026 meeting.
The other policy rates moved up with it: the Standing Deposit Facility (SDF) rate is now 5.25%, and the Marginal Standing Facility (MSF) rate and the Bank Rate are now 5.75%.
The MPC changed its stance (its signal about future moves) to "calibrated tightening". This means rate cuts are off the table for now, but the RBI is not promising a hike at every meeting.
The RBI raised its GDP growth forecast for FY27 (2026-27) by 40 basis points, from 6.7% to 7.1%, because the economy has stayed strong.
It also raised its CPI (retail) inflation forecast for FY27 to 5.2%, because food and fuel prices are rising. The RBI pointed to the renewed West Asia conflict, high commodity prices (prices of raw goods like crude oil) and new frictions in world trade as risks.
Monetary Policy Committee (MPC): How RBI Sets the Repo Rate
The Monetary Policy Committee is a six-member body that decides the repo rate, which is the rate at which the RBI lends short-term money to banks. When the repo rate goes up, loans across the country slowly become costlier, people borrow and spend less, and price rise (inflation) cools down. The MPC has three members from the RBI (the Governor is the chairperson) and three outside experts appointed by the central government. Along with the rate, it announces a "stance", which is a hint about where rates may go next.
The MPC used its power under the RBI Act to raise the repo rate because it expects inflation to rise, mainly from food and fuel prices. By shifting the stance to "calibrated tightening", it told markets that cuts are unlikely soon, while keeping the freedom to pause if inflation cools.
Liquidity Adjustment Facility (LAF): The RBI's Interest Rate Corridor
The Liquidity Adjustment Facility is the set of daily tools the RBI uses to add money to the banking system or take extra money out. It works like a corridor with a floor and a ceiling. The floor is the Standing Deposit Facility (SDF), the rate at which banks can park spare money with the RBI. The ceiling is the Marginal Standing Facility (MSF), an emergency window where banks can borrow overnight. The repo rate sits in the middle, and short-term market interest rates usually stay inside this corridor.
Because the SDF and MSF are fixed at 25 basis points on either side of the repo rate, the 25 basis point hike lifted the entire corridor. So both the rate banks earn on spare cash (SDF) and the rate they pay in an emergency (MSF) went up together.
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 central government. In India, that target is 4%, measured by the Consumer Price Index (CPI), with a band of 2% to 6%. It is called "flexible" because the RBI may also keep economic growth in mind, and does not have to hit 4% at every moment. When the RBI expects inflation to move away from 4%, it changes the repo rate to pull it back.
The RBI now expects CPI inflation of 5.2% in FY27. This is still inside the 2%–6% band but well above the 4% target. Under this framework, the MPC acted early with a rate hike so that inflation moves back towards 4% instead of rising further.
- Repo rate: raised by 25 basis points, from 5.25% to 5.50% (MPC vote: unanimous)
- First repo rate hike since February 2023
- SDF rate: 5.25%; MSF rate and Bank Rate: 5.75%
- Stance: changed to "calibrated tightening" (earlier used by the MPC in October 2018)
- FY27 real GDP growth forecast: raised by 40 basis points, from 6.7% to 7.1%
- FY27 CPI inflation forecast: raised to 5.2%
- Previous meeting (August 2026): repo rate kept at 5.25%
- Inflation target: 4% CPI (band 2%–6%), valid from 1 April 2026 to 31 March 2031
- MPC: 6 members, legal basis Section 45ZB of the RBI Act, 1934