After 21 consecutive MPC meetings without a rate hike, the RBI is expected to raise the repo rate by 25 basis points to 5.5 percent on October 7, marking the first increase since February 2023. Elevated crude prices near $107 per barrel, a rupee crossing 96 per dollar, and rising global bond yields are complicating India's inflation outlook. India's Q1 GDP growth stood at 7.8 percent, giving the RBI limited room to prioritise growth over inflation control.

This event is a textbook illustration of monetary policy transmission under the RBI's inflation-targeting framework. Since 2016, the MPC operates under a flexible inflation targeting (FIT) framework with a CPI target of 4 percent, with a tolerance band of ±2 percent. The repo rate is the rate at which the RBI lends overnight funds to commercial banks — raising it increases the cost of borrowing across the economy, cooling demand and, in theory, inflation.

The LAF (Liquidity Adjustment Facility) corridor is central here. The repo rate forms the ceiling of the corridor; the Standing Deposit Facility (SDF) rate, introduced in April 2022 at 25 bps below repo, is the floor. The Weighted Average Call Rate (WACR) is the operating target of monetary policy — when surplus liquidity is high, WACR drifts toward the floor. The RBI's OMO sales and VRRR operations are designed to push WACR back toward the repo rate, tightening the effective policy stance even before a formal rate hike.

A 25-bps hike, if accompanied by a hawkish stance, signals a rate-hike cycle — not a one-off move. Economists projected roughly 75 bps in cumulative hikes through February, which means aspirants should understand the distinction between the policy rate level and the policy stance (neutral vs. withdrawal of accommodation). The CRR (Cash Reserve Ratio) can also absorb surplus liquidity structurally, complementing OMO sales.

For NABARD aspirants, the repo rate hike directly raises NABARD's refinancing costs — short-term refinance to cooperative banks and RRBs is priced linked to repo — affecting agricultural credit availability and cost.