Source: The Hindu
Context:
The Monetary Policy Committee voted unanimously on 5 August 2026 to keep the policy repo rate under the Liquidity Adjustment Facility unchanged at 5.25%, after assessing evolving macroeconomic and financial developments.
The Decision
| Parameter | Outcome |
|---|---|
| Repo rate | 5.25% — unchanged, unanimous (6-0) |
| Standing Deposit Facility (SDF) | 5.00% |
| Marginal Standing Facility (MSF) and Bank Rate | 5.50% |
| Stance | Neutral — continued |
| CPI inflation, FY27 | 5.0% (lowered 10 bps) — Q1 5.3%, Q2 4.7%, Q3 5.9%, Q4 5.5% |
| Real GDP growth, FY27 | Raised to 6.7% from 6.6% |
| Last rate revision | December 2025 |
| Next meeting | 5–7 October 2026 |
Background Concepts
Liquidity Adjustment Facility (LAF) — the RBI’s principal instrument for managing day-to-day liquidity in the banking system, operating through a corridor of rates:
| Rate | Function |
|---|---|
| SDF (5.00%) | Floor of the corridor. Banks park surplus funds with the RBI without collateral; introduced in April 2022, replacing the fixed reverse repo as the effective floor |
| Repo (5.25%) | The policy rate. Rate at which the RBI lends to banks against government securities for short periods |
| MSF (5.50%) | Ceiling of the corridor. Banks borrow overnight beyond their normal limits, dipping into the SLR portfolio |
| Bank Rate (5.50%) | Rate for RBI’s long-term lending, without collateral; aligned to MSF and used for penal purposes |
The corridor is symmetric — 25 basis points on either side of the repo rate. Its width signals how tightly the RBI wants to anchor overnight money market rates; a narrower corridor means tighter control.
Policy stance — the forward guidance signal, distinct from the rate itself:
- Accommodative — bias toward easing, supporting growth.
- Neutral — no directional bias; the MPC may move either way as data evolves.
- Withdrawal of accommodation / Tightening — bias toward raising rates or draining liquidity.
Practice MCQs
Q1. With reference to the Monetary Policy Committee decision of August 2026, consider the following statements:
- The Committee unanimously decided to keep the policy repo rate unchanged at 5.25 per cent.
- It decided to continue with the neutral policy stance.
- The Standing Deposit Facility rate stood at 5 per cent, while the Marginal Standing Facility rate and the Bank Rate stood at 5.5 per cent.
- The policy repo rate is fixed under the Liquidity Adjustment Facility.
How many of the above statements are correct? (a) Only one (b) Only two (c) Only three (d) All four (e) None
Q2. With reference to the liquidity adjustment facility corridor, consider the following statements:
- The Standing Deposit Facility rate forms the floor of the corridor.
- Under the Standing Deposit Facility, banks park surplus funds with the Reserve Bank without providing collateral.
- The Marginal Standing Facility rate forms the ceiling of the corridor.
- The repo rate is the rate at which the Reserve Bank lends to banks against government securities.
How many of the above statements are correct? (a) Only one (b) Only two (c) Only three (d) All four (e) None
Answer Key
- (d) — All four are correct. The unanimity of the vote and the retention of the neutral stance indicate that the pause reflected shared judgement rather than a divided committee.
- (d) — All four are correct. The key distinction is collateral: the SDF is uncollateralised, whereas the repo and MSF involve government securities — the MSF specifically allowing banks to dip into their SLR holdings.
Exam Relevance
RBI Grade B — Highest-priority current-affairs item. Expect direct questions on the August 2026 numbers and descriptive questions on monetary policy transmission, the neutral stance and managing external shocks. Master the statutory scaffolding: Section 45ZB (constitution), 45ZA (target), 45ZN (failure report), and the corridor mechanics. The strongest analytical themes are (i) why monetary policy is a blunt instrument against supply shocks; (ii) the rupee–capital flows–US yields channel; and (iii) the “neither dovish nor hawkish” framing as an articulation of what a neutral stance means in practice.
