The RBI has announced a repo rate hike of 25 basis points to 5.50% and changed its policy stance from “neutral” to “calibrated tightening”. It is the first increase since February 2023. This note explains the policy rates, the meaning of each stance, the Monetary Policy Committee and the prelims traps around them.
Why in News?
The Monetary Policy Committee (MPC), chaired by RBI Governor Sanjay Malhotra, voted unanimously to raise the policy repo rate from 5.25% to 5.50%.
Reasons cited:
- renewed inflation pressures
- high crude oil prices linked to the West Asia conflict
- a weaker rupee
The RBI raised its FY27 real GDP growth projection to 7.1% and its CPI inflation projection to 5.2%.
Key Facts for Prelims: Repo Rate Hike
| Policy Rate | New Level | Position in Corridor |
|---|---|---|
| Policy Repo Rate | 5.50% (up from 5.25%) | Middle (policy rate) |
| Standing Deposit Facility (SDF) | 5.25% | Floor (repo minus 25 bps) |
| Marginal Standing Facility (MSF) | 5.75% | Ceiling (repo plus 25 bps) |
| Bank Rate | 5.75% | Aligned with MSF |
- Stance: Changed from neutral to calibrated tightening
- Vote: Unanimous (6–0)
- Significance: The repo rate hike ends a long pause that followed the rate cuts of 2025
Concepts Behind the Repo Rate Hike
1. Policy Repo Rate: The fixed rate at which the RBI provides short-term liquidity to banks against government securities (G-secs) as collateral.
- Meaning of “repo”: Repurchase agreement. A bank sells G-secs to the RBI and agrees to buy them back later at a higher price. The difference works as the interest, which is the repo rate.
- Effect of a repo rate hike: Borrowing becomes costlier for banks. Loan rates rise and demand cools, which helps control inflation.
2. Standing Deposit Facility (SDF): Introduced in April 2022 to absorb surplus liquidity without giving collateral.
- Under the old fixed-rate reverse repo, the RBI had to give G-secs to banks. SDF is uncollateralised.
- SDF replaced the reverse repo as the floor of the Liquidity Adjustment Facility (LAF) corridor. An amendment to the RBI Act in 2018 enabled it.
3. Marginal Standing Facility (MSF): An emergency overnight window. Scheduled commercial banks can borrow from the RBI when inter-bank liquidity dries up, even by dipping into their SLR holdings up to a set limit. It is the ceiling of the corridor.
4. Bank Rate: The rate at which the RBI lends long-term funds without collateral (Section 49 of the RBI Act). Today it is aligned with the MSF and is mainly used to set penal rates.
RBI Policy Stances Explained
| Stance | What It Signals |
|---|---|
| Accommodative | Rate cut or pause; no hike. Supports growth. |
| Neutral | Rates can move either way, depending on data |
| Calibrated tightening | Rate cuts are off the table; the next move is a small hike or a pause |
| Withdrawal of accommodation | Gradually draining excess liquidity and removing earlier support |
Note: “Calibrated tightening” was first used by the RBI in October 2018, when it moved from neutral without changing the repo rate.
Static Link: Monetary Policy Committee and Inflation Targeting
- Legal basis: Section 45ZB of the RBI Act, 1934, inserted through the 2016 amendment
- Composition: Six members. Three are from the RBI: the Governor (Chairperson), the Deputy Governor in charge of monetary policy and one officer nominated by the Central Board. Three are external members appointed by the Central Government for four years.
- Voting: Quorum of four, one vote each; the Governor has a casting vote in a tie
- Meetings: At least four times a year
- Inflation target: CPI inflation of 4% with a tolerance band of ±2%, set by the Centre in consultation with the RBI every five years (Section 45ZA)
- Failure: If average inflation stays above 6% or below 2% for three consecutive quarters, the RBI must report to the Centre the reasons and remedial action
- Transmission: Since October 2019, floating-rate retail and MSME loans are linked to an external benchmark such as the repo rate. So a repo rate hike reaches these borrowers faster.
Quick Revision Table: Repo Rate Hike
| Parameter | Fact |
|---|---|
| New repo rate | 5.50% (+25 bps) |
| SDF (floor) | 5.25% |
| MSF and Bank Rate (ceiling) | 5.75% |
| Stance | Neutral to calibrated tightening |
| MPC vote | Unanimous |
| FY27 GDP growth projection | 7.1% |
| FY27 CPI inflation projection | 5.2% |
| Inflation target | 4% ± 2% (CPI) |
| Legal basis of MPC | Section 45ZB, RBI Act 1934 |
| Last repo rate hike before this | February 2023 |
Trap / Confusing Points
| Common Confusion | Correct Position |
|---|---|
| SDF and reverse repo work the same way | No. Under reverse repo the RBI gives G-secs as collateral. SDF needs no collateral. |
| Calibrated tightening means a hike at every meeting | No. It only rules out cuts. The RBI can hike or pause. |
| Bank Rate and repo rate are the same | No. Repo is short-term lending against G-secs. Bank Rate is long-term lending without collateral and is aligned with the MSF. |
| The Finance Ministry has a voting member on the MPC | No. Three members are from the RBI and three are external experts appointed by the Centre. |
| 25 basis points = 2.5% | No. 1 basis point = 0.01%, so 25 bps = 0.25%. |
| The RBI’s inflation target is based on WPI | No. The target is based on CPI (Combined) inflation. |
Practice MCQs on Repo Rate Hike
1. With the repo rate at 5.50%, the SDF and MSF rates are respectively:
a. 5.25% and 5.75%
b. 5.00% and 6.00%
c. 3.35% and 5.75%
d. 5.25% and 6.25%
Ans: A
Explanation: SDF is the floor at repo minus 25 bps. MSF is the ceiling at repo plus 25 bps. The corridor is 50 bps wide.
2. The Standing Deposit Facility differs from the fixed-rate reverse repo because it:
a. Requires G-secs as collateral
b. Absorbs liquidity without the RBI giving collateral
c. Is a long-term lending window
d. Is available only to NBFCs
Ans: B
Explanation: SDF, introduced in April 2022, is uncollateralised. It is now the floor of the LAF corridor.
3. A “calibrated tightening” stance implies that:
a. Rate cuts are likely
b. Rates can move in either direction
c. There will be no rate cut; the next action is a hike or a pause
d. Liquidity will be injected through OMOs
Ans: C
Explanation: Calibrated tightening takes rate cuts off the table and limits future action to small hikes or pauses.
4. The Monetary Policy Committee is constituted under:
a. Banking Regulation Act, 1949
b. Reserve Bank of India Act, 1934
c. FRBM Act, 2003
d. Article 292 of the Constitution
Ans: B
Explanation: Section 45ZB of the RBI Act, 1934, inserted by the 2016 amendment, provides for the six-member MPC.
5. Under the flexible inflation targeting framework, the RBI’s inflation target is:
a. 2% ± 1% (WPI)
b. 4% ± 2% (CPI)
c. 5% ± 1% (CPI)
d. 6% ± 2% (WPI)
Ans: B
Explanation: The target is CPI inflation of 4%, with a tolerance band of 2% to 6%.
Exam tip: Compare this repo rate hike with our note on the earlier 5.25% neutral-stance policy. Examiners often test how stance and rates have moved over time.
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