Retail inflation in India's third quarter is projected to peak at 6.1 per cent, breaching the RBI's upper tolerance limit of 6 per cent. Analysts now expect the Monetary Policy Committee to respond with two successive 25-basis-point repo rate hikes — one each in October and December — to bring inflation back within the 2–6 per cent target band. This would mark a hawkish pivot after a period of rate stability, directly tightening credit costs across the economy.

India's inflation targeting framework, adopted in 2016 under an amended RBI Act, mandates the MPC to keep CPI inflation at 4 per cent with a tolerance band of ±2 per cent (i.e., 2–6 per cent). Breaching the upper bound of 6 per cent for three consecutive quarters legally triggers a failure of the mandate, requiring the RBI to explain itself to the government in writing.

When inflation breaches the upper limit, the MPC's primary instrument is the repo rate — the rate at which scheduled banks borrow from the RBI under the LAF (Liquidity Adjustment Facility). A rate hike increases the cost of borrowing for banks, which then pass it on to borrowers, suppressing consumption and investment demand, and thereby cooling inflation. This is monetary transmission.

The transmission chain: Repo rate hike → higher bank borrowing costs → higher lending rates (MCLR/EBR) → reduced credit demand → lower consumption and investment → moderated inflation.

For NABARD-focused aspirants, a repo rate hike directly raises the cost of short-term refinancing, including agricultural credit. NABARD's refinancing rates to cooperative banks and RRBs track repo movements, which can squeeze rural credit availability.

The two-hike scenario (Oct + Dec, 25 bps each) would cumulatively add 50 bps, implying a new repo rate of 6.75 per cent if the current rate is 6.25 per cent. The examiner will almost certainly blank out one of these numbers and ask you to fill it in.