RBI Raises the Repo Rate to 5.50%: Its First Hike in Nearly Four Years
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%. All six members voted for the hike.
This is the first increase since February 2023, when the repo rate was raised to 6.50%. Between February and December 2025, the RBI had cut the rate four times, by a total of 1.25 percentage points.
With the hike, the Standing Deposit Facility (SDF) rate moved to 5.25% and the Marginal Standing Facility (MSF) rate to 5.75%.
The MPC changed its "stance" (its signal about future moves) to calibrated tightening. The RBI said rate cuts are off the table for now; the next move can only be a hike or a pause.
The reason is rising prices (inflation). Retail inflation was 4.82% in August, above the 4% target for three months in a row. Costlier crude oil because of conflict in West Asia, weak monsoon rain linked to El Niño and a weaker rupee are pushing prices up.
The RBI now expects inflation to average 5.2% in 2026-27 (about 6.0% in the October to December quarter). It also raised its 2026-27 growth (GDP) forecast to 7.1% from 6.7%.
Monetary Policy Committee (MPC): How RBI Sets the Repo Rate
The Monetary Policy Committee is a six-member committee that decides India's main interest rate, the repo rate. When it raises this rate, loans across the country slowly become costlier, people borrow and spend less, and price rise slows down. Its legal job is to keep inflation close to 4%, while also keeping growth in mind. The MPC got legal backing in 2016 through the Finance Act, 2016, which amended the RBI Act, 1934.
The MPC used its power to raise the repo rate because inflation has stayed above the 4% target and is expected to rise further. By choosing a "calibrated tightening" stance, it has told markets that more hikes are possible, but they will come step by step and depend on the data.
Liquidity Adjustment Facility (LAF): The RBI's Interest Rate Corridor
The Liquidity Adjustment Facility is the set of daily tools the RBI uses to put money into the banking system or take extra money out. Banks with too little cash borrow from the RBI; banks with too much cash park it with the RBI. The rates on these windows form a "corridor", and the overnight rate at which banks lend to each other usually stays inside it. When the RBI moves the repo rate, the whole corridor moves with it.
The 25 basis point hike shifted the whole corridor up: the SDF to 5.25% and the MSF to 5.75%. Because the banking system currently has a large cash surplus (about ₹5.9 lakh crore a day on average), overnight rates sit near the SDF floor. So raising the floor is what actually pushes market interest rates up.
Imported Inflation: How Global Prices and a Weak Rupee Raise Prices at Home
Imported inflation is a rise in prices inside India that comes from outside the country. It happens when things India buys from abroad become costlier, either because their world price rises or because the rupee becomes weaker against the dollar. Crude oil is the biggest example, because India imports most of its oil. Costlier oil raises the cost of petrol, diesel, transport and many goods, and that spreads to prices across the economy.
The RBI's hike is mainly a response to imported inflation. Oil prices have jumped because of the West Asia conflict and the rupee has weakened, so imports cost more in rupees. A higher repo rate aims to stop this cost shock from spreading into a lasting, broad rise in prices.
- Repo rate: raised by 25 basis points to 5.50% (from 5.25%), unanimous MPC vote
- SDF: 5.25%; MSF and Bank Rate: 5.75%
- Last hike before this: February 2023 (to 6.50%)
- 2025 rate cuts: February (25 bps), April (25 bps), June (50 bps), December (25 bps); total 125 bps
- New stance: calibrated tightening
- CPI inflation, August 2026: 4.82%; core inflation 4.2%
- RBI inflation projection, 2026-27: 5.2% (Q3: 6.0%, Q4: 5.7%)
- RBI GDP growth projection, 2026-27: 7.1% (raised from 6.7%); Q1 growth 7.8%
- Bank credit growth: 18.1% year-on-year
- Inflation target: 4% CPI with 2% to 6% band (Section 45ZA, RBI Act, 1934)