A Six-Member Committee Raised India's Repo Rate to 5.50 Per Cent on 7 October 2026, Aiming at a 4 Per Cent Inflation Target the Government Has Renewed Until March 2031

On 7 October 2026 the Monetary Policy Committee of the Reserve Bank of India voted unanimously to raise the repo rate by 25 basis points to 5.50 per cent. The repo rate is the rate at which the Reserve Bank lends to banks, for short periods, against government and other approved securities, and a basis point is one hundredth of a percentage point. The decision came at the committee’s 63rd meeting, held from 5 to 7 October, and the committee also changed its stance to what it calls calibrated tightening.

The statute that created the Reserve Bank in 1934, as amended in 2016, divides the work. A six-member committee sets the rate. The Union Government fixes the inflation target the committee works to, appoints three of the six members, and receives the Reserve Bank’s surplus each year. The Reserve Bank approved a surplus transfer of Rs 2,86,588.46 crore (about Rs 2.87 lakh crore) for 2025-26.

The six-member committee that sets the repo rate

The Reserve Bank of India Act is Act No. 2 of 1934, dated 6 March 1934. The Bank began operations on 1 April 1935 and has been wholly owned by the Government since it was nationalised in 1949. Section 3 of the Act says it was constituted to take over the management of the currency from the Central Government and to carry on the business of banking.

The Reserve Bank’s own 2025 discussion paper describes the 2016 change as a shift from a Governor-centred approach to monetary policy to a collegial one. The Finance Act, 2016 added Chapter III-F to the Act and rewrote its preamble, which now says the primary objective of monetary policy is “to maintain price stability while keeping in mind the objective of growth”. The new provisions took effect on 27 June 2016, and the first committee was constituted on 29 September 2016.

Section 45ZB lists the members: the Governor as chair, the Deputy Governor in charge of monetary policy, one Reserve Bank officer nominated by the Central Board, and three persons appointed by the Central Government. Each member has one vote and a majority decides. If votes are equal, the Governor has a second, casting vote, and in May 2026 the Deputy Governor said that provision had not been needed in the previous ten years. Section 45ZB(4) says the committee’s decision binds the Bank.

The October 2026 resolution gives its reasons. Consumer price inflation rose to 4.8 per cent in August 2026 from 4.5 per cent in July, and the Reserve Bank projected 5.2 per cent for 2026-27, with real growth of 7.1 per cent. The standing deposit facility rate, the rate at which the Bank takes overnight deposits from banks, moved to 5.25 per cent, and the marginal standing facility rate, which banks pay for overnight borrowing from the Bank, moved to 5.75 per cent, with the Bank Rate following it.

The rate vote was unanimous, but two members preferred to keep the earlier neutral stance. The resolution itself notes that it is hard to tell the knock-on effects of price rises from the indirect effect of higher energy and input costs, since both show up in the same indicators.

The 4 per cent target the Government sets

Section 45ZA says the Central Government, in consultation with the Bank, determines the inflation target in terms of the Consumer Price Index once in every five years and notifies it in the Official Gazette. The Reserve Bank’s 2025 discussion paper dates the framework to a Monetary Policy Framework Agreement between the Government and the Bank in 2015. The first notification came on 5 August 2016: a target of 4 per cent, with an upper tolerance level of 6 per cent and a lower one of 2 per cent, running to 31 March 2021, as the Reserve Bank’s overview page records.

The Government kept the same numbers on 31 March 2021 for April 2021 to March 2026. The second review ended with a Gazette notification dated 25 March 2026, which renews 4 per cent with a band of 2 per cent either side for 1 April 2026 to 31 March 2031. The same page lists all three periods.

Before that renewal the Reserve Bank published a discussion paper on 21 August 2025 asking four questions: whether to target headline or core inflation, whether 4 per cent is still right, whether the band should change, and whether a point target should give way to a range. The Deputy Governor’s speech of 5 May 2026 reports 75 direct responses. Of the 72 who answered on headline versus core, 66 chose headline. Two-thirds of respondents wanted to keep the band at 2 per cent either side, while 21 favoured a narrower one, nine of them at 1.5 per cent. Of 56 who answered on the point target, 52 wanted to keep it and four wanted a range.

The same speech sets out the Reserve Bank’s assessment of the framework. Average headline inflation was 8.1 per cent in 2006 to 2016 and 4.6 per cent in 2016 to 2026, it says, and average annual growth was 7.0 per cent in the second decade against 6.8 per cent in the first, leaving out the two Covid years. It adds that 48 countries now run inflation targets, and 47 of them target headline inflation.

What happens when inflation leaves the band

Under Section 45ZN the Bank must report to the Government if it fails to meet the target. The Government has defined failure as average inflation above the upper level, or below the lower level, for three quarters in a row. The report must give the reasons, the remedial steps and a time estimate for returning to target.

This has happened once. The Reserve Bank’s 2025 discussion paper says inflation stayed above 6 per cent for five consecutive quarters, from the fourth quarter of 2021-22 to the fourth quarter of 2022-23. It says the committee met on 3 November 2022 for that purpose and the Bank sent a report to the Government. A footnote in the same paper counts one failure so far.

How each side checks the other

The Government’s tools are written into the Act. It appoints the three outside members on the recommendation of a search-cum-selection committee under Section 45ZC, chaired by the Cabinet Secretary, with the Governor or a Deputy Governor, the Secretary of the Department of Economic Affairs and three experts the Government names. Appointees cannot be Members of Parliament or of a state legislature, public servants or Bank employees. Under Section 45ZD they serve four years and cannot be reappointed.

Section 8 provides for two Government officials on the Bank’s Central Board, who may attend and speak but cannot vote. The Secretary of the Department of Financial Services attended the Board meeting of 22 May 2026. Section 45ZI(9) lets the Government send the committee its views in writing. Section 7 allows the Government to give the Bank directions it considers necessary in the public interest, after consulting the Governor.

The Bank’s own duties run the other way. Under Sections 45ZK to 45ZM it publishes the resolution after each meeting, the minutes on the fourteenth day with each member’s vote and written reasons, and a Monetary Policy Report every six months. Sections 20 and 21 make the Bank the Government’s banker and the manager of its public debt, and Section 21(3) says that if the two cannot agree on terms, the Government decides them. Section 21A lets states sign similar agreements, and our piece on how a state budget works covers their borrowing.

Who sets the rupee’s value

The Constitution lists “currency, coinage and legal tender; foreign exchange” at entry 36 of the Union List and the Reserve Bank at entry 38. Our guide to the Seventh Schedule’s three lists shows where those entries sit.

The Reserve Bank’s position is that the market sets the rupee’s price. The Governor’s statement of 7 February 2025 says the Reserve Bank’s interventions aim at smoothing excessive and disruptive volatility, not at any exchange rate level or band, and adds that the rate “is determined by market forces”. The Monetary Policy Report of October 2026 repeats that the Bank is guided by containing excess volatility and not by a level.

The report’s figures show the rupee between Rs 92 and Rs 97 to the US dollar from April to September 2026. The rupee fell 1.4 per cent against the dollar in April to September 2026, after a 6.2 per cent fall in October 2025 to March 2026. The report says measures announced by the Reserve Bank and the Government to bolster capital flows halted its decline.

On 5 June 2026 the Bank announced a swap facility to encourage banks to raise foreign-currency deposits from non-residents, and the report counts US$ 133.0 billion of gross inflows into those deposits between 8 June and 31 August 2026. The Governor’s statement puts foreign exchange reserves at US$ 734.6 billion on 2 October 2026, about eleven months of imports. Our piece on the 1991 reforms covers the adjustment of the rupee in July 1991.

The surplus the Reserve Bank hands the Government

Section 47 says that after provision for bad debts, depreciation, staff funds and other items bankers usually provide for, the balance of the profits is paid to the Central Government. How much the Bank sets aside first is the Central Board’s decision, under a formula called the Economic Capital Framework. In the Union’s accounts the payment is booked under dividends and profits within non-tax revenue, according to the 2026-27 Receipt Budget, and our guide to how the Union Budget is passed follows those papers through Parliament.

The framework’s main reserve is the Contingent Risk Buffer, a cushion held as a share of the Bank’s balance sheet. The Board approved a revised framework on 15 May 2025 with a buffer range of 4.5 to 7.5 per cent, and the Bank’s release says no surplus goes to the Government until a minimum level of realised equity is reached.

The 2018-19 figure was Rs 1,23,414 crore of surplus plus Rs 52,637 crore of excess provisions released under the framework adopted on 26 August 2019. For 2025-26 the Reserve Bank’s release gives net income before risk provisions of Rs 3,95,972.10 crore. The Board put Rs 1,09,379.64 crore into the buffer and approved Rs 2,86,588.46 crore for the Government.

The 2018 to 2019 review of the Bank’s reserves

In October 2018 a Deputy Governor, Viral Acharya, gave the A. D. Shroff Memorial Lecture on why a central bank should be independent of the executive branch of government. He said weakening that independence could trigger a crisis of confidence in the capital markets that governments borrow from. On the other side of the question, the Act gives the Government Section 47, which entitles it to the balance of the profits, and Section 7, its power to give directions.

The Central Board met on 19 November 2018 and decided to set up an expert committee to examine the Bank’s Economic Capital Framework, with membership and terms to be fixed jointly by the Government and the Bank. The committee was constituted on 26 December 2018 under Dr. Bimal Jalan, a former Governor. Its terms of reference named both claims: the Section 47 mandate to transfer profits and the Bank’s public policy role, including financial stability.

On 26 August 2019 the Board accepted all the committee’s recommendations. The Bank’s release said they were guided by the fact that the Bank forms “the primary bulwark for monetary, financial and external stability”. The same decision approved the Rs 1,76,051 crore transfer.

What comes next

The minutes of the October 2026 meeting are due on 21 October 2026, and the committee’s next meeting is on 2 to 4 December 2026.

In a May 2026 speech the Deputy Governor said that if growth and inflation behave as they have over the past ten years, a future review could consider a slightly lower target and a slightly narrower band. The speech added that a harsh global environment would argue for keeping the present flexibility. The current target period ends on 31 March 2031.