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Monetary policy and inflation

How the Reserve Bank of India sets interest rates to keep inflation near its target, and how inflation is measured.

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Monetary policy in an oil shock

Prelims and Mains

LeadMonetary policy in an oil shock: why the Reserve Bank heldJune 2026

Why in news

On 5 June 2026 the Monetary Policy Committee kept the repo rate at 5.25 per cent with a neutral stance. It cut its growth forecast for 2026-27 and raised its inflation forecast, as the conflict in West Asia pushed up the price of crude oil.

Background

Since 2016 the Reserve Bank of India has followed flexible inflation targeting: consumer price inflation of 4 per cent, within a band of 2 to 6 per cent.
A committee of six sets the repo rate, the rate at which the Reserve Bank lends to banks overnight.

The committee had cut the rate through 2025 to 5.25 per cent, and then held it.
In spring 2026 the conflict in West Asia and the disruption in the Strait of Hormuz took the Indian crude basket to about 110 dollars a barrel.

A supply shock, not a demand surge

Inflation in May was still below 4 per cent. Yet the committee raised its forecast for the year to 5.1 per cent, because it assumed dearer crude.
A rise in prices caused by costlier oil is a supply shock. Raising interest rates does not produce more oil; it only cuts demand.
So a central bank looks through the first round of such a shock.
It acts if the shock spreads into wages and into what people expect prices to be. These are the second round effects.

Why not cut, and why not raise

Growth was slowing: the forecast fell to 6.6 per cent, with a weak monsoon expected. That argued for a cut.
The rupee was falling and foreign investors were leaving. A cut would have narrowed India's interest advantage over rates abroad and added to the outflow.
A rise would have hurt a slowing economy to fight an inflation that money cannot cure.
So the committee held, and the Reserve Bank used other tools to draw in foreign money (see the lead on defending the rupee).

The limits of inflation targeting

Food and fuel make up a large part of the consumer price basket, and both are driven by supply.
This revives an old question: should the target be headline inflation or core inflation, which leaves out food and fuel?

The first line of defence against a fuel shock is often fiscal: a cut in fuel taxes acts on the price directly.

The way forward

Keep the stance neutral until the paths of oil and the monsoon are clear.
Use fuel tax and buffer stocks against the first round, and monetary policy against the second.
Communicate clearly, since expectations are anchored by what the central bank is believed to do.

Prelims facts

The committee has six members: three from the Reserve Bank and three appointed by the Centre. The Governor has a casting vote.
The target is set by the Centre in consultation with the Reserve Bank, for five years at a time.
The corridor: Standing Deposit Facility 5.00, repo 5.25, Marginal Standing Facility 5.50 per cent.
The Bank Rate moves with the Marginal Standing Facility rate.
The Standing Deposit Facility was introduced in 2022.

Open the lead on its own page

Since 2016 the Reserve Bank of India has followed flexible inflation targeting: consumer price inflation of 4 per cent, within a band of 2 to 6 per cent.

What changed

5 Aug 2026newly added
- At its August meeting the Monetary Policy Committee kept the repo rate at 5.25 per cent with a neutral stance, its fourth pause in a row.
- The Reserve Bank raised its growth forecast for 2026-27 to 6.7 per cent and trimmed its inflation forecast to 5.0 per cent.
The Hindu, 5 Aug 2026: Sensex gains as RBI keeps policy rates unchanged (opens in a new tab) · Reserve Bank of India, 5 Aug 2026: Statement on Developmental and Regulatory Policies (opens in a new tab)
5 Jun 2026LeadMonetary policy in an oil shock: why the Reserve Bank held

Consumer and wholesale price inflation

Prelims

The Consumer Price Index (CPI) measures inflation in retail prices, and the Wholesale Price Index (WPI) measures prices at the wholesale stage.

The National Statistics Office under the Ministry of Statistics and Programme Implementation releases the CPI every month, on a base of 2024 = 100 since February 2026.
Under Section 45ZA of the Reserve Bank of India Act, 1934, the target is 4 per cent CPI inflation within a band of 2 to 6 per cent.
Food and beverages carry the largest weight in the CPI basket, about 46 per cent.
The WPI is on a 2022-23 base and is due to give way to a Producer Price Index.

What changed

14 Sep 2026Briefnewly addedCPI inflation for August 2026 rose to 4.82 per cent, above the 4 per cent target. The Hindu (PTI), 14 Sep 2026: Retail inflation rises to 4.82% in August (opens in a new tab) · Ministry of Statistics and Programme Implementation, 14 Sep 2026: CPI press release for August 2026 (opens in a new tab)

Show history (3 other updates)

12 Aug 2026Briefnewly addedCPI inflation for July 2026 was 4.45 per cent, a 19 month high and above the 4 per cent target. The Hindu, 12 Aug 2026: Retail inflation hits 19-month high of 4.45% in July 2026 as food, fuel prices rise (opens in a new tab) · Ministry of Statistics and Programme Implementation, 12 Aug 2026: CPI press release for July 2026 (opens in a new tab)
13 Jul 2026Briefnewly addedCPI inflation for June 2026 was 4.38 per cent, the first time the new series has crossed the 4 per cent target, though it stayed within the band. Ministry of Statistics and Programme Implementation, 13 Jul 2026: CPI press release for June 2026 (opens in a new tab)
12 Jun 2026Briefnewly addedCPI inflation for May 2026 was 3.93 per cent, the highest in about 16 months but still below the 4 per cent target. Wholesale inflation on the new series was 9.68 per cent in May against 3.93 per cent for consumer prices, a gap that shows producers' costs not yet passed to retail. PIB, 12 Jun 2026: CPI press release for May 2026 (opens in a new tab) · The Hindu, 15 Jun 2026: Wholesale inflation jumps to 9.7% in May 2026 on surging fuel prices (opens in a new tab)

Also filed elsewhere

The Producer Price Index and the new statistical series · on Growth, national accounts and their revision
An index measures change against a base year.
The swap window, reserves and liquidity · on Balance of payments, the rupee and reserves
In June the Reserve Bank opened a window under which banks could swap dollars raised from non residents for rupees, at a subsidised cost (see the June lead).