RBI MPC Holds Repo Rate at 5.25 %

Source: The Hindu, June 2026

Context

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has unanimously voted to hold the policy repo rate at 5.25 per cent under the Liquidity Adjustment Facility (LAF) and continue with the neutral stance. The decision was driven by a deteriorating global environment, with the West Asia conflict, extended supply-chain disruptions, elevated energy prices, and uncertainty over the south-west monsoon and El Niño. The MPC has cut its real GDP growth projection for 2026-27 to 6.6 per cent (from 6.9 per cent) and raised the CPI inflation projection to 5.1 per cent (from 4.6 per cent, that is, 50 bps higher).

Key Facts

• Repo rate unchanged: The policy repo rate stays at 5.25 per cent, the rate at which the RBI lends short-term money to banks.
• Other rates: The Standing Deposit Facility (SDF) rate stays at 5.00 per cent, and both the Marginal Standing Facility (MSF) rate and the Bank Rate stay at 5.50 per cent.
• Stance: The MPC continues with a neutral stance, meaning it is neither tightening nor easing, but watching the data.
• Vote: The decision was unanimous.
• GDP growth for FY27 cut to 6.6 per cent from the earlier 6.9 per cent, reflecting a drag from global supply constraints and elevated energy prices.
• Quarter-wise GDP growth for FY27: Q1 at 6.6 per cent, Q2 at 6.3 per cent, Q3 at 6.5 per cent, Q4 at 6.8 per cent.
• CPI inflation for FY27 raised to 5.1 per cent, which is 50 bps higher than the earlier 4.6 per cent projection.
• Quarter-wise CPI for FY27: Q1 at 4.2 per cent, Q2 at 5.1 per cent, Q3 at 5.9 per cent, Q4 at 5.4 per cent.
• Core CPI projected at 4.7 per cent for FY27.
• CPI to firm up to the upper tolerance level in Q3 of 2026-27, with the impact of the supply shock waning from Q4.
• Crude oil prices (Indian basket) averaged about USD 110 per barrel during April-May 2026, much higher than assumed in the April policy.
• Risk factors: West Asia conflict, supply-chain disruptions, sub-normal south-west monsoon forecast, El Niño, and second-round effects on wages and inflation expectations.
• Mitigating factors: Programmes for crop diversification, water harvesting and conservation, climate-resilient practices, and short-duration crops.
• MPC’s reasoning to hold rates: Although risks of higher inflation have amplified, it was felt prudent to wait for greater clarity to emerge. Decisions will remain data-dependent.

Key Terms (Simple)

• Repo Rate: The interest rate at which the RBI lends short-term money to commercial banks against government securities. The main policy rate.
• Standing Deposit Facility (SDF): A facility for banks to park surplus money with the RBI without collateral, at a rate slightly below the repo rate.
• Marginal Standing Facility (MSF): A facility for banks to borrow overnight from the RBI in emergencies, at a rate slightly above the repo rate.
• Bank Rate: A rate at which the RBI lends to commercial banks without collateral, usually aligned with the MSF rate.
• Liquidity Adjustment Facility (LAF): The RBI’s main toolkit to manage short-term liquidity in the banking system, including repo, reverse repo, SDF, and MSF.
• Neutral Stance: A monetary policy stance that does not commit to either tightening or easing, giving the MPC flexibility to respond as data evolves.
• CPI Inflation: The rate of change in retail prices of a representative basket of goods and services, as measured by MoSPI’s CPI (Combined).
• Core CPI: CPI inflation excluding food and fuel, considered a measure of underlying inflation.
• Tolerance Band: India’s inflation target is 4 per cent with a band of plus or minus 2 percentage points, so the upper tolerance is 6 per cent, and the lower tolerance is 2 per cent.
• Pass-through: How much of a change in input prices (like crude oil) flows into retail prices of goods and services.
• Second-round Effects: When initial price rises (like fuel or food) feed into wages and inflation expectations, making inflation more persistent.
• El Niño: A periodic warming of the eastern Pacific Ocean, often linked to weaker monsoons and droughts in India.

Practice MCQs

Q1. With reference to the RBI MPC’s latest decisions, consider the following statements:

1. The MPC kept the policy repo rate unchanged at 5.25 per cent.
2. The standing deposit facility (SDF) rate stands at 5.00 per cent, and the MSF rate and bank rate stand at 5.50 per cent.
3. The MPC voted unanimously and continued with the neutral stance.
4. The MPC has reduced India’s CPI inflation projection for 2026-27.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

(Statement 4 is wrong; the MPC has raised the CPI projection for 2026-27 to 5.1 per cent, which is 50 bps higher than the earlier projection.)

Q2. Consider the following statements about the RBI’s revised projections for 2026-27:

1. Real GDP growth for 2026-27 has been revised down to 6.6 per cent from 6.9 per cent.
2. CPI inflation for 2026-27 has been raised to 5.1 per cent.
3. The quarter-wise GDP growth projections are 6.6 per cent for Q1, 6.3 per cent for Q2, 6.5 per cent for Q3, and 6.8 per cent for Q4.
4. CPI inflation is projected to firm up to the upper tolerance level in Q3 of 2026-27.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

Q3. With reference to the institutional framework of India’s monetary policy, consider the following statements:

1. The Monetary Policy Committee (MPC) is a six-member committee of the RBI under the inflation-targeting framework.
2. CPI inflation is the official target for monetary policy, with a tolerance band of 4 per cent plus or minus 2 percentage points.
3. The standing deposit facility (SDF) rate forms the lower bound of the LAF corridor, while the MSF rate forms the upper bound.
4. The bank rate is the rate at which commercial banks lend to retail customers and is not set by the RBI.

Which of the above are correct?

(a) 1, 2 and 3 only (b) 1, 3 and 4 only (c) 2 and 4 only (d) 1 and 4 only (e) All four

(Statement 4 is wrong; the bank rate is the rate at which the RBI lends to commercial banks and is set by the RBI, not by banks themselves.)

Q4. Consider the following statements about the global and domestic backdrop influencing the MPC’s decision:

1. The MPC noted that the global environment has deteriorated since the last policy meeting due to a lingering conflict and elevated energy prices.
2. The MPC flagged concerns about a sub-normal south-west monsoon forecast and El Niño risks.
3. The MPC emphasised that despite global shocks, CPI inflation has so far remained below the target due to limited pass-through.
4. The MPC has indicated that India’s monetary policy will be conducted entirely independently of global supply-chain conditions.

Which of the above are correct?

(a) 1, 2 and 3 only (b) 1, 3 and 4 only (c) 2 and 4 only (d) 1 and 4 only (e) All four

(Statement 4 is wrong; the MPC explicitly discussed global supply chains and conflict spillovers in its reasoning, which means monetary policy is closely connected to global conditions.)

Answer Key

1. (c), Statements 1, 2, 3 are correct; Statement 4 is wrong because the MPC has raised, not reduced, the CPI projection for 2026-27.
2. (d), All four statements are correct.
3. (a), Statements 1, 2, 3 are correct; Statement 4 is wrong because the bank rate is set by the RBI, not by commercial banks.
4. (a), Statements 1, 2, 3 are correct; Statement 4 is wrong because the MPC’s reasoning shows monetary policy is closely tied to global supply-chain conditions.

Exam Relevance

Banking (RBI Gr B, SBI PO, IBPS, NABARD)	Very high importance, MPC decisions, rates, inflation framework
RBI Grade B	Core area, Economic and Social Issues, Finance and Management