How the RBI sets interest rates: the repo rate and the MPC

Every two months or so, the Reserve Bank of India (RBI) announces whether it is changing the repo rate, the interest rate at which it lends money overnight to banks. That one number travels through the whole economy: it nudges what banks pay on deposits and charge on loans, and through them how much people and companies borrow, spend and invest.

Who decides

Since 2016 the decision has been taken by the Monetary Policy Committee (MPC), set up by an amendment to the Reserve Bank of India Act, 1934. It has six members:

• the RBI Governor, who chairs it;
• the Deputy Governor in charge of monetary policy;
• one other RBI officer, nominated by the RBI’s central board; and
• three outside experts, appointed by the central government for four years.

The committee must meet at least four times a year; in practice it meets six times, on dates published in advance. Four members make a quorum. Each member has one vote and the majority decides; if the votes are tied, the Governor has a second, casting vote. On the fourteenth day after each meeting the RBI publishes the minutes, with each member’s vote and reasons.

What it aims at

The law asks the MPC to keep prices stable while keeping the objective of growth in mind. The central government, in consultation with the RBI, sets an inflation target every five years. The target first notified in 2016, and kept for April 2021 to March 2026, is 4% inflation in consumer prices, with a tolerance band from 2% to 6%. If average inflation stays outside the band for three quarters in a row, the RBI must report to the government why it missed the target, what it will do, and how long it expects to take.

The tools

• Repo rate — the rate at which banks borrow from the RBI overnight against government securities. This is the rate the MPC votes on.
• Standing deposit facility (SDF) — what the RBI pays banks that leave spare money with it overnight. Since April 2022 it has been the floor of the “corridor”, 0.25 percentage points below the repo rate.
• Marginal standing facility (MSF) — the penal rate at which banks can borrow in an emergency; the ceiling of the corridor, 0.25 points above the repo rate.
• Cash reserve ratio (CRR) — the share of their deposits banks must keep with the RBI. The RBI sets it itself; it is not an MPC decision.

Each decision also comes with a stance: a signal of where rates are heading next, for example “neutral”. In October 2026 the MPC raised the repo rate by 0.25 percentage points, to 5.50%.

How it reaches your loan

A change in the repo rate does not move every loan at once. Since October 2019, new floating-rate loans to individuals and small businesses have had to be linked to an external benchmark — in practice usually the repo rate — and reset at least once every three months. Older loans linked to a bank’s own lending rate, the marginal cost of funds based lending rate (MCLR), follow more slowly. Fixed deposits already made keep their rate until they mature.

Why it matters now

When prices rise quickly, a higher repo rate makes borrowing dearer and saving more rewarding, which cools spending and, with a lag of months, inflation. When the economy is weak and inflation is low, a cut does the opposite. The MPC has to judge both from data that arrive late and are often revised — which is why its statements spend as much time on forecasts as on the latest figures. Our topic page on India’s economy, the rupee and rates follows each decision.