UPSC Darpan

EconomyGS35 October 2026

RBI’s MPC Meets October 5–7 With ET Poll Expecting a 25 bp Hike to 5.50%

Open in the app — quiz, notes, Mistake Vault हिंदी में पढ़ें

The news

Mumbai. The Reserve Bank of India’s six-member Monetary Policy Committee (MPC) begins a three-day meeting on Monday, October 5, with its decision due on October 7. This is a preview, not a decision. An Economic Times poll of 21 economists and bank executives finds 20 expecting a rise of 25 basis points (a basis point is one-hundredth of a percentage point) in the repo rate, the rate at which the RBI lends to banks, from 5.25% to 5.50%; one expects no change. ET cites Brent crude above $100 since early September against the RBI’s FY27 assumption of $85, a June–September monsoon deficit of nearly 13%, and the US Fed’s September rise, which has cut the India–US 10-year yield gap to 189 bp.

The chain in one line: West Asia conflict lifts Brent above $100 → imported fuel costs and a weak monsoon push inflation toward 6% → the US Fed raises rates and India’s yield advantage narrows → strong growth removes the case for waiting → MPC weighs a hike

Static syllabus linkage

  1. The MPC is a statutory six-member committee that decides by majority. Section 45ZB of the RBI Act, 1934 gives the Governor as chair, the Deputy Governor for monetary policy, one RBI officer, and three external members appointed by the Centre. Decisions bind the RBI, and the Governor has a casting vote in a tie. Under Section 45ZA the Centre sets the inflation target every five years; ET prints 4% with a 2% band.
  2. The policy corridor puts the repo between a floor and a ceiling. The Standing Deposit Facility (SDF), where banks park surplus cash without collateral, is 25 bp below the repo; the Marginal Standing Facility (MSF), the emergency overnight window, is 25 bp above. The RBI’s rate page shows repo 5.25%, SDF 5.00%, MSF 5.50%, so a 25 bp hike would lift SDF to 5.25% and MSF to 5.75%.

Why UPSC loves this

  1. Inflation and monetary policy sit under GS3 resource mobilisation. The syllabus line is “Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment”.

Prelims nuggets

  • The Monetary Policy Committee is constituted under Section 45ZB of the RBI Act, 1934: three members from the RBI including the Governor as chair, and three appointed by the Central Government.
  • Under Section 45ZA of the RBI Act, the Central Government, in consultation with the RBI, notifies the inflation target once every five years.
  • The Standing Deposit Facility is the floor and the Marginal Standing Facility the ceiling of the liquidity corridor, with the repo rate between them.
  • The Cash Reserve Ratio is the share of deposits banks hold with the RBI in cash; the Statutory Liquidity Ratio is the share held in liquid assets.

Analysis

  1. A rate rise cannot refill an oil tanker, but it can stop an oil shock becoming a price habit. This is mostly a supply shock, and as the Bank of England’s Swati Dhingra warns, rates will not reopen a blocked strait. They do restrain “second-round” effects, when firms and workers lift prices and wages because they expect more inflation. ET’s Mythili Bhusnurmath adds that the government has absorbed the oil rise so far, a cushion that will not last.
  2. The hike defends the capital account, because global money is no longer cheap. Ms Bhusnurmath notes the balance of payments was negative by $23.6 billion in 2025-26, and the swap window “cannot be viewed as a permanent solution”. The Indian Express notes US and French 10-year yields up 1.2–1.4 points in a year against 0.7 for India’s 7.21%. Bank of Baroda’s Madan Sabnavis counters that a hike could dent festival spending.
  3. Lens — Short-term relief and long-term reform: an early small hike is cheaper than a late large one. Holding rates gives festive relief; a 4% target that markets believe is the long-term reform that keeps borrowing cheap. If inflation reaches the 6.2–6.3% some fear, Goldman Sachs expects a longer tightening cycle. A thoughtful policymaker would hike a little now, while accepting that no rate cures dependence on imported oil and the monsoon.

Possible Mains question

“A rate rise cannot cure inflation caused by oil and a weak monsoon.” Do you agree? Use India’s present situation. (10 marks, 150 words)

Model approach

  1. Directive — Do you agree. Take a position and meet the counter-view.
  2. Introduction — MPC meets with Brent above $100 and a 13% monsoon deficit. Name the 4% target and 2% band.
  3. Body — rates cannot lower oil or grain prices. A supply shock is not cured by demand restraint.
  4. Body — but they stop second-round effects and defend the rupee. Value addition: Section 45ZA target. Diagram: oil price to expectations to wages, hike cutting the last link.
  5. Conclusion — pair a small hike with supply measures. Buffer stocks, imports and fuel taxes carry the supply side.

Administrator's brainstorm

As an MPC member you see strong growth but rising inflation expectations. How do you decide, and explain it?

I would decide on the inflation forecast two to four quarters ahead, not today’s print, against the 4% target and 2–6% band. Publicly I would explain the reasoning plainly, say what data would change my view, and avoid surprising the market, because credibility is the RBI’s main tool.