The RBI's Monetary Policy Committee raised the repo rate by 25 basis points to 5.50% on 7 October 2026, continuing its inflation-management stance. India's foreign exchange reserves stood at $734.6 billion at the time, providing a substantial buffer for currency management. The rate hike influences borrowing costs, credit growth, and the rupee's exchange rate against the dollar, with oil prices and capital flows adding further pressure on the USD-INR exchange rate.

The repo rate is the rate at which the RBI lends short-term funds to commercial banks against government securities. When the MPC raises the repo rate, borrowing becomes costlier for banks, which transmit this to consumers and businesses through higher lending rates. This reduces money supply in the economy, cools demand-driven inflation, and can attract foreign capital seeking higher yields — all of which tend to strengthen the rupee.

The transmission mechanism works as follows: Repo rate hike → higher bank lending rates → reduced credit offtake → lower consumption and investment → moderated inflation. Simultaneously, higher domestic interest rates relative to US rates can attract foreign portfolio investment, improving the capital account and supporting the rupee.

Foreign exchange reserves act as a buffer. At $734.6 billion, India's reserves allow the RBI to intervene in forex markets — selling dollars to prevent sharp rupee depreciation — without exhausting its capacity. The adequacy of reserves is often measured in terms of import cover (months of imports they can finance).

Oil prices are a critical variable because India imports approximately 85% of its crude oil needs. A rise in oil prices widens the current account deficit, increases dollar demand, and depreciates the rupee. The MPC must therefore balance inflation targeting (often requiring rate hikes) with growth considerations (favouring rate cuts), making each MPC decision a calibrated judgement under the flexible inflation targeting framework mandated under the RBI Act.