Explainers · Banking & economy

Repo Rate and Inflation Targeting

How the RBI uses the repo rate to control inflation, and who decides it.

Step by step

1. What is the repo rate?

   The rate at which the RBI lends money to banks for a short period (usually overnight), with government securities as collateral. 'Repo' is short for repurchase agreement.

2. Why does it matter?

   When the RBI raises the repo rate, banks pay more to borrow, so loans become costlier for people and businesses. Spending slows and inflation tends to fall. A cut does the opposite and supports growth.

3. The rate corridor

   The repo rate sits in the middle of a corridor. The floor is the Standing Deposit Facility (SDF), the rate the RBI pays banks for parking spare money with it, without collateral. The ceiling is the Marginal Standing Facility (MSF), the emergency rate at which banks can borrow overnight. Each is 25 basis points (0.25%) away from the repo rate.

4. Who decides?

   The Monetary Policy Committee (MPC): six members, three from the RBI (including the Governor, who chairs it) and three appointed by the Central Government. It meets at least four times a year; in practice every two months. If votes tie, the Governor has a casting vote.

5. What is the target?

   The Government sets an inflation target for the RBI every five years. The current target is 4% CPI inflation, with a band of 2% to 6%, for April 2026 to March 2031.

Current figures (as of 6 November 2026)

• Repo rate5.50% (raised by 25 bps on 7 Oct 2026)
• Standing Deposit Facility (SDF)5.25%
• Marginal Standing Facility (MSF)5.75%
• Bank Rate5.75%
• Cash Reserve Ratio (CRR)3%
• Statutory Liquidity Ratio (SLR)18%

Exam facts

• LawRBI Act, 1934 (amended in 2016 to create the MPC)
• MPC members6 (3 RBI + 3 external)
• Chair of MPCRBI Governor
• Inflation measureCPI (Combined) headline inflation
• Target4% with a band of 2%–6% (till 31 March 2031)
• Recommended byUrjit Patel Committee (2014)
• 1 basis point0.01%