RBI Monetary Policy Committee keeps policy repo rate unchanged at 5.25%

Economy · 6 August 2026 · Based on The Hindu (original report)

2-minute summary

The Reserve Bank of India’s Monetary Policy Committee (MPC) unanimously decided to keep the benchmark policy repo rate unchanged at 5.25% while maintaining a 'neutral' monetary stance. Consequently, the Standing Deposit Facility (SDF) rate remains at 5.00%, and both the Marginal Standing Facility (MSF) rate and Bank Rate stand at 5.50%. The decision reflects the assessment that recent inflationary spikes in June 2026 (CPI at 4.4%) were primarily driven by localized food and fuel price pressures rather than broad-based demand conditions. Core inflation (CPI excluding food and fuel) remained stable at 3.9%, and even lower at 2.3–2.5% when excluding precious metals. Real GDP growth for 2026-27 is projected at 6.7%, bolstered by resilient private consumption, construction, capital goods activity, and robust services exports. However, adverse weather risks from El Niño affecting the southwest monsoon, volatile international energy prices, and global trade uncertainties remain key downside concerns.

Why it's in the news

In August 2026, the RBI Monetary Policy Committee voted unanimously to keep the policy repo rate unchanged at 5.25% with a neutral stance. The decision was guided by rising headline inflation driven by supply-side food and fuel shocks alongside steady, low core inflation.

Background and context

Monetary policy formulation in India operates under the Flexible Inflation Targeting (FIT) framework adopted in 2016 following amendments to the Reserve Bank of India Act, 1934. Based on the recommendations of the Urjit Patel Committee (2014), the framework mandates the RBI to target Headline CPI inflation at 4% within a tolerance band of +/- 2% (2% to 6%). The policy rate decisions are taken by the statutory six-member Monetary Policy Committee (MPC), comprising three internal members from the RBI and three external experts appointed by the Central Government. The RBI manages liquidity through the Liquidity Adjustment Facility (LAF) corridor, bounded by the Standing Deposit Facility (SDF) as the floor rate and the Marginal Standing Facility (MSF) as the ceiling rate, centered around the benchmark Repo rate. When inflation spikes are localized to volatile supply-side items like food and fuel while core demand pressures remain benign, central banks often maintain rate pauses to protect economic growth while monitoring secondary price spillovers.

Committees and reports

• Urjit Patel Committee (Expert Committee to Revise and Strengthen the Monetary Policy Framework) — Recommended flexible inflation targeting (FIT), adoption of CPI as the nominal anchor, and the establishment of a Monetary Policy Committee.

Previous UPSC questions on this theme

• Prelims GS-1 2017 — Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC)? 1. It decides the RBI's benchmark interest rates. 2. It is a 12-member body including the Governor of RBI and is reconstituted every year. 3. It functions under the chairmanship of the Union Finance Minister. (a) 1 only (b) 1 and 2 only (c) 3 only (d) 2 and 3 only
• Prelims GS-1 2020 — If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do ? 1. Cut and optimize the Statutory Liquidity Ratio 2. Increase the Marginal Standing Facility Rate 3. Cut the Bank Rate and Repo Rate Select the correct answer using the code given below : (a) 1 and 2 only (b) 2 only (c) 1 and 3 only (d) 1, 2 and 3

Mains practice: Differentiate between Headline Inflation and Core Inflation. Examine the challenges faced by monetary policy when headline inflation rises primarily due to transient supply-side shocks.

Inflation measurement in India primarily relies on the Consumer Price Index (CPI). Headline Inflation represents the overall rate of price rise across the entire CPI basket, including volatile components like food, vegetables, and energy. In contrast, Core Inflation excludes food and fuel components, serving as a measure of underlying, persistent demand-pull inflation.

Key differences and policy implications include:

• Volatile vs Sticky Prices: Headline inflation is sensitive to seasonal agricultural disruptions, weather anomalies like El Niño, and global geopolitical oil shocks. Core inflation reflects sticky prices in services and manufactured goods driven by consumer demand.

• Limitations of Rate Adjustments: Raising policy repo rates to curb headline inflation caused purely by supply bottlenecks (e.g., crop shortages) is ineffective because monetary tightening cannot directly augment physical supply.

• Risk of Overshooting: Tightening monetary policy prematurely during supply-side shocks can unduly raise borrowing costs, dampening investment and private consumption, thereby slowing aggregate economic growth.

• Risk of Generalisation: If food and fuel price spikes persist, they can spill over into transport costs, wage demands, and inflation expectations, eventually escalating core inflation.

In scenarios where headline inflation spikes due to transient shocks while core inflation remains contained, monetary policy authorities typically maintain a rate pause or neutral stance (as demonstrated by the RBI MPC). This relies on fiscal supply-side interventions to ease immediate shortages while preserving overall economic growth.

Prelims practice questions

Q1. Which of the following statements regarding the Monetary Policy Committee (MPC) of the Reserve Bank of India is/are correct? 1. It is a statutory body constituted under the Reserve Bank of India Act, 1934. 2. The Union Finance Minister acts as the ex-officio Chairperson of the MPC. 3. It consists of six members with three appointed by the Central Government.

1. 1 and 2 only
2. 1 and 3 only
3. 2 and 3 only
4. 1, 2 and 3

Answer: B. Statement 1 is correct: The MPC is a statutory body established under Section 45ZB of the amended RBI Act, 1934. Statement 2 is incorrect: The RBI Governor, not the Finance Minister, acts as the ex-officio Chairperson. Statement 3 is correct: The MPC consists of 6 members—3 from the RBI and 3 nominated by the Central Government.

Q2. In the context of Indian macroeconomics, 'Core Inflation' is best described as:

1. The retail price inflation restricted entirely to capital goods and real estate.
2. Inflation calculated exclusively using the Wholesale Price Index (WPI).
3. The overall inflation rate including agricultural commodities and imported crude oil.
4. Headline Consumer Price Index inflation excluding volatile food and fuel components.

Answer: D. Core Inflation measures underlying trend inflation by excluding volatile components—specifically food and fuel—from the Consumer Price Index (CPI) basket.

Q3. Consider the following interest rates under the RBI's Liquidity Adjustment Facility (LAF) corridor: 1. Repo Rate 2. Marginal Standing Facility (MSF) Rate 3. Standing Deposit Facility (SDF) Rate Which of the following represents the correct ascending order of these rates under standard operational policy?

1. SDF Rate < Repo Rate < MSF Rate
2. Repo Rate < SDF Rate < MSF Rate
3. MSF Rate < Repo Rate < SDF Rate
4. SDF Rate < MSF Rate < Repo Rate

Answer: A. Under the LAF corridor framework, the Standing Deposit Facility (SDF) rate acts as the floor (Repo Rate minus 25 bps), the Repo Rate is the benchmark, and the Marginal Standing Facility (MSF) rate acts as the ceiling (Repo Rate plus 25 bps).

Revision flashcards

• What is the statutory monetary target for inflation in India? 4% Headline CPI inflation, with an upper tolerance limit of 6% and a lower tolerance limit of 2% (+/- 2% band).
• What is the composition of the Monetary Policy Committee (MPC)? 6 members: RBI Governor (Chairperson), RBI Deputy Governor in charge of monetary policy, one RBI officer, and three external members appointed by the Central Government.
• What is the Standing Deposit Facility (SDF)? A liquidity absorption facility introduced by the RBI in 2022 that allows banks to deposit uncollateralized excess funds with the RBI at a rate lower than the Repo rate.
• How does Core Inflation differ from Headline Inflation? Headline Inflation measures total CPI price changes, whereas Core Inflation excludes volatile components (Food and Fuel) to reflect structural demand.
• Which committee recommended the implementation of Flexible Inflation Targeting (FIT) in India? The Urjit Patel Committee (2014).