How the RBI fights inflation: the repo rate and inflation targeting

When prices climb too quickly, the Reserve Bank of India reaches for a familiar lever. Its main tool is the repo rate — the interest rate at which it lends short-term money to commercial banks. Raise it, and loans across the economy grow costlier, cooling demand; cut it, and borrowing and spending pick up.

Since 2016 the RBI has operated under a framework called Flexible Inflation Targeting. The mandate is specific: keep retail inflation, measured by the Consumer Price Index, at 4%, within a tolerance band of 2% to 6%. The target is written into law, not left to the central bank's discretion.

Rate decisions are not taken by the Governor alone. A six-member Monetary Policy Committee — three members from the RBI and three appointed by the government — votes on where the repo rate should sit. The structure was designed to make policy more transparent and less dependent on any single official.

In its June 2026 review, the committee weighed softening food prices against an uncertain global backdrop before settling on the rate. For aspirants, the mechanics matter most: a change in the repo rate travels slowly through the banking system to the interest you finally pay on a home or business loan — the so-called transmission of monetary policy.