Quick answer (40–60 words): The Reserve Bank of India’s (RBI) monetary policy sets interest rates and manages liquidity to keep inflation around 4% (±2%) while supporting growth. As of August 2025, the repo rate is 5.50% and the MPC kept it unchanged in the August review, signalling a neutral stance. (Reserve Bank of India, The Economic Times, The Financial Express)
Last updated: 15 August 2025
What is RBI’s monetary policy?
RBI’s monetary policy is the framework through which the central bank influences the cost and availability of money in the economy. The legal mandate is inflation targeting: maintain CPI inflation at 4% with a tolerance band of 2%–6% (currently notified for April 2021–March 2026). (Reserve Bank of India)
Objectives under India’s inflation-targeting framework
- Price stability: Anchor inflation near 4% while avoiding persistent breaches of 2%–6%. (Reserve Bank of India)
- Growth and financial stability: Support sustainable growth and a stable financial system through calibrated liquidity and communication.
- Accountability: If inflation stays outside 2%–6% for three consecutive quarters, RBI must explain causes and remedies to the Government. (Wikipedia)
What’s next? A July 2025 report indicated RBI’s internal panel is likely to recommend retaining the 4% target and 2–6% band in the next review, implying continuity. (The Economic Times)
Who decides? The Monetary Policy Committee (MPC)
- Composition: 6 members — 3 from RBI (including the Governor as Chair) and 3 external experts nominated by the Government. Decisions are by majority; the Governor has a casting vote. (Wikipedia)
- Frequency: Meets at least once a quarter; in practice six times a year on a published calendar. For FY26, meetings were slated in Apr, Jun, Aug, Oct, Dec, and Feb; the August meeting was rescheduled to Aug 4–6, 2025. (5paisa, Caalley)
- Outputs: Policy rate decision, stance (e.g., neutral), projections for growth and inflation, and minutes with each member’s rationale.
How RBI implements policy: the toolkit
1) Policy repo rate (under the Liquidity Adjustment Facility, LAF):
The rate at which banks borrow overnight from RBI against collateral. It is the operational anchor for short-term money market rates. (Reserve Bank of India)
2) LAF corridor:
- Floor: Standing Deposit Facility (SDF) — introduced April 2022, an uncollateralised facility to absorb surplus liquidity, set 25 bps below the repo.
- Ceiling: Marginal Standing Facility (MSF) — emergency collateralised borrowing, typically 25 bps above repo. (Reserve Bank of India, Press Information Bureau, ForumIAS)
3) Variable rate operations:
- VRRR auctions to absorb liquidity; VRR to inject funds — used to keep the overnight rate aligned with repo. (Shankar IAS Parliament)
4) Reserve requirements:
- Cash Reserve Ratio (CRR): share of deposits parked with RBI (no interest). CRR was 4% as of April 9, 2025. (Reuters)
5) Open Market Operations (OMOs) & FX:
RBI buys/sells government bonds and intervenes in FX markets to smooth liquidity and rupee volatility; its actions influence yields and currency conditions (e.g., interventions around tariff-related rupee pressure in Aug 2025). (Reuters)
Why this matters to your money
1) Home, auto, and MSME loans
- Most new retail loans are linked to external benchmarks (e.g., repo-linked lending rate). When the repo falls, EMIs on floating-rate loans typically decline with a lag; when it rises, EMIs increase. Bank spread and reset frequency matter. (SBI’s MCLR also influences legacy loans.) (The Economic Times)
2) Debt mutual funds & bonds
- Bond prices move inversely to yields. A simple rule:
Estimated price change (%) ≈ − Modified Duration × ΔYield.
Longer-duration funds gain more when RBI cuts; they can fall more when RBI hikes.
3) Equities
- Lower rates reduce discount rates and can support valuations, especially for rate-sensitives (banks, NBFCs, autos, real estate). Higher rates compress P/E multiples and slow credit growth.
4) Currency & global assets
- A relatively lower interest differential can weaken the rupee at the margin, affecting importers, gold, and overseas portfolios; RBI’s FX actions often smooth extremes. (Reuters)
The current context (August 2025)
- Repo rate: 5.50%; the MPC kept rates unchanged in August, maintaining a neutral stance after front-loaded cuts earlier in 2025. (The Economic Times, The Financial Express)
- 2025 trajectory: After holding at 6.50% through 2023–24, the RBI cut to 6.25% in February, 6.00% in April, and 5.50% in June; August was a pause. (EFG, Reuters, Press Information Bureau)
Visual: RBI repo rate cycle (May 2022–Aug 2025)
Download the chart
Sources for the timeline include RBI/PIB notices and major outlets reporting the 2022–2025 decisions. (Reserve Bank of India, Reserve Bank of India, Press Information Bureau, Reuters, EFG)
How to read policy day like a pro
- Policy stance: “Accommodative/Neutral/Tightening” hints at future moves.
- Inflation & growth projections: Compare RBI’s CPI and GDP paths to your assumptions.
- Liquidity view: VRRR/OMO guidance shows how tight or easy money markets may be. (The Financial Express)
- Vote split & minutes: Divergences among members can foreshadow pivots. (Wikipedia)
- Global cues: US Fed guidance, oil prices, tariffs, and the rupee all feed into MPC risk-assessment. (Reuters)
Simple, useful formulas
- Real policy rate ≈ Repo − Expected CPI
Example (illustrative): If repo is 5.50% and 1-year ahead CPI is 3.5%, real ≈ 2.0% — restrictive vs history. - Back-of-envelope EMI sensitivity
For a ₹50 lakh, 20-year loan, a 25 bps rate change moves EMI by roughly ₹800–₹900 per month (approximation; actual impact depends on reset cycle and bank spread).
FAQs
Is the RBI legally bound to the 4% target?
Yes. The Government notified 4% with a 2%–6% band for 2021–2026 under the amended RBI Act’s monetary policy framework. A review by March 2026 will set the next period’s target. (Reserve Bank of India)
Who exactly votes on rate decisions?
A six-member MPC — three RBI officials (Governor chairs) and three Government-appointed externals; decisions are by majority with a casting vote for the Governor. (Wikipedia)
What is SDF and why did it replace reverse repo?
The Standing Deposit Facility is an uncollateralised floor for the LAF corridor, set 25 bps below repo; introduced in April 2022, it replaced the fixed reverse repo as the operational floor. (Reserve Bank of India, Press Information Bureau)
Where can I see the schedule for MPC meetings?
Financial year calendars are widely published; FY26 meetings were planned for Apr, Jun, Aug, Oct, Dec, Feb; the August 2025 meeting was advanced to Aug 4–6. (5paisa, Caalley)
What’s the repo rate now?
5.50% after the August 2025 review (status-quo). (The Economic Times)
Key takeaways for Indian investors
- RBI targets 4% CPI with 2%–6% band; watch the stance and the projection tables every policy. (Reserve Bank of India)
- As of Aug 2025, the policy is on hold at 5.50% after front-loaded cuts; duration in debt funds and rate-sensitive sectors will react most to the next shift. (The Economic Times)
- Track SDF–Repo–MSF corridor, VRRR/OMOs, and CRR to judge liquidity and near-term yield moves. (Reserve Bank of India, Press Information Bureau, Reuters)
References: RBI press releases and Governor’s statements; PIB policy updates; Reuters, Economic Times, Financial Express, and other publicly available sources cited above. (Reserve Bank of India, Reserve Bank of India, Press Information Bureau, Reuters, The Economic Times, The Financial Express)
Compliance note: Educational content only; not investment advice.