Economy · Monetary policy · Banking awareness
RBI Repo Rate Explained: How the Monetary Policy Committee Works, the October 2026 Hike and What It Means for Your EMI
When the Reserve Bank of India changes the repo rate, it makes headlines because it affects loan EMIs, deposit rates, inflation and growth. On 7 October 2026 the RBI raised the repo rate for the first time since 2023. This guide explains the mechanism behind such decisions and how they reach your bank account.
The policy rates in plain words
| Rate or ratio | What it is |
|---|---|
| Repo rate | The rate at which the RBI lends money to banks for short periods against government securities. It is the main policy rate. |
| Standing Deposit Facility (SDF) | The rate at which banks can park surplus money with the RBI without giving collateral; introduced in 2022 and now the floor of the interest-rate corridor (it replaced the reverse repo rate in that role). |
| Marginal Standing Facility (MSF) | The rate at which banks can borrow overnight in an emergency by dipping into their SLR securities; the ceiling of the corridor. The Bank Rate is aligned with the MSF. |
| Cash Reserve Ratio (CRR) | The share of deposits banks must keep as cash with the RBI. |
| Statutory Liquidity Ratio (SLR) | The share of deposits banks must hold in liquid assets such as government securities. |
The corridor works like this: SDF below the repo rate, MSF above it, usually 25 basis points on either side. (100 basis points = 1 percentage point.)
Who decides: the Monetary Policy Committee
- Created by an amendment to the RBI Act, 1934 in 2016, under the framework of flexible inflation targeting.
- The government sets an inflation target of 4% CPI inflation, with a tolerance band of 2% to 6%.
- The MPC has six members: three from the RBI (the Governor, who chairs it and has a casting vote, a Deputy Governor and one more officer) and three external members appointed by the Government.
- It meets at least four times a year (in practice, six) and decides by majority.
- Its stance — for example accommodative, neutral, tightening — signals the likely direction of future decisions.
The recent path of the repo rate
- February 2023: the repo rate was raised to 6.50%, ending a series of increases after the post-COVID inflation surge, and was then held for a long period.
- 2025: with inflation easing, the RBI began cutting the rate. A series of cuts brought the repo rate down to 5.25%, alongside a reduction in the CRR to release liquidity.
- 2026 (first half): the rate was held at 5.25% with a neutral stance.
- 7 October 2026: the MPC raised the repo rate by 25 basis points to 5.50%, the first increase since February 2023, and changed its stance from neutral to "calibrated tightening". The SDF moved to 5.25% and the MSF and Bank Rate to 5.75%. The RBI cited inflation risks from elevated oil prices, tighter global financial conditions and weather-related food price risks, and projected CPI inflation for 2026–27 at 5.2% and GDP growth at 7.1%.
How a repo change reaches your EMI
Since 1 October 2019, the RBI has required banks to link new floating-rate loans to retail borrowers and MSMEs to an external benchmark — most banks use the repo rate. This is called an External Benchmark Lending Rate (EBLR).
- Your loan rate = repo rate + the bank's spread.
- The rate must be reset at least once every three months.
- So a 0.25% repo increase usually raises your loan rate by 0.25% at the next reset.
Older loans may still be linked to the MCLR (marginal cost of funds–based lending rate) or base rate, which react more slowly. Borrowers can usually switch to EBLR by paying a fee.
What happens when the rate rises
Banks usually keep your EMI unchanged and extend the loan tenure, unless you ask to increase the EMI. Increasing the EMI (or prepaying) saves more interest in the long run.
Example: A home loan of ₹30 lakh for 20 years at 8.0% has an EMI of about ₹25,100. If the rate goes up by 0.25% to 8.25%, the EMI for the same tenure rises to about ₹25,560 — roughly ₹470 more a month. If the EMI is kept the same, the tenure stretches instead.
Why the RBI raises or cuts rates
- To control inflation: higher rates make borrowing costlier, reduce demand and cool prices.
- To support growth: lower rates make borrowing cheaper, encouraging investment and consumption.
- To stabilise the rupee and capital flows, in some situations.
The time between a rate change and its full effect on the economy (the transmission lag) is often several quarters.
Practice questions
Q1. The repo rate is the rate at which:
- (a) Banks lend to the public
- (b) The RBI lends to banks against government securities
- (c) Banks lend to each other
- (d) The government borrows from the public
Show answer
Answer: (b) The RBI lends to banks against government securities — Repo is short-term lending by the RBI to banks against securities.
Q2. How many members does the Monetary Policy Committee have?
- (a) Four
- (b) Five
- (c) Six
- (d) Seven
Show answer
Answer: (c) Six — Three RBI members and three external members make up the six-member MPC.
Q3. The inflation target under India's flexible inflation targeting framework is:
- (a) 2% ± 1%
- (b) 3% ± 1%
- (c) 4% with a band of 2% to 6%
- (d) 5% with a band of 3% to 7%
Show answer
Answer: (c) 4% with a band of 2% to 6% — The target is 4% CPI inflation within a tolerance band of 2–6%.
Q4. On 7 October 2026, the RBI changed the repo rate to:
- (a) 5.00%
- (b) 5.25%
- (c) 5.50%
- (d) 6.50%
Show answer
Answer: (c) 5.50% — The MPC raised the repo rate by 25 basis points from 5.25% to 5.50%.
Q5. Floating-rate retail loans linked to an external benchmark must be reset at least once every:
- (a) Month
- (b) Three months
- (c) Six months
- (d) Year
Show answer
Answer: (b) Three months — RBI rules require reset at least once every three months.
Q6. Which facility forms the floor of the RBI's interest-rate corridor?
- (a) MSF
- (b) Bank Rate
- (c) Standing Deposit Facility
- (d) CRR
Show answer
Answer: (c) Standing Deposit Facility — The SDF, introduced in 2022, is the floor; the MSF is the ceiling.
Q7. 50 basis points equals:
- (a) 0.05%
- (b) 0.5%
- (c) 5%
- (d) 50%
Show answer
Answer: (b) 0.5% — 100 basis points = 1%, so 50 basis points = 0.5%.
Frequently asked questions
Does a repo rate hike affect my fixed-rate loan?
No. Fixed-rate loans keep the agreed rate. Floating-rate loans linked to the repo rate change at the next reset.
Do deposit rates also rise after a repo hike?
Often, but not immediately or by the same amount. Banks adjust deposit rates based on their funding needs and competition.
Who is the chairperson of the MPC?
The Governor of the Reserve Bank of India chairs the Monetary Policy Committee.
Official sources
Rules, dates and figures can change. Always check the latest official notification or government release before relying on a detail.