M7.02 taught the RBI's tools in general. Here they operate on India, because the specifics are what you read on decision day and what move Indian bond and equity prices.
The anchor: the repo rate. The RBI's policy rate is the repo rate, the rate at which it lends overnight reserves to banks against government securities. As of mid-2026 it is ~5.25% (check at rbi.org.in; the RBI cut it through 2025 from a 6.50% peak as inflation eased). The repo is the single number under every Indian discount rate. It anchors the overnight call rate, which anchors the short end of the G-sec curve, which, plus a term premium, anchors the 10-year G-sec, which anchors the risk-free rate in every Indian CAPM and WACC you build (M3.03). When you read "the MPC cut the repo 25 bps," translate it immediately: the gravity under every Indian valuation just weakened slightly.
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How does the RBI's policy corridor work?
The corridor: SDF and MSF. The RBI does not leave the overnight rate to wander; it brackets it with a symmetric ±25-bp corridor (M7.02 §4.3):
- The floor, the SDF (Standing Deposit Facility), at repo − 25 bps (so ~5.00% at a 5.25% repo). A bank with spare reserves can always park them at the RBI and earn the SDF, so no bank lends overnight for less. The SDF was introduced in April 2022; before it, the reverse-repo was the floor.
- The ceiling, the MSF (Marginal Standing Facility), at repo + 25 bps (so ~5.50%). A bank short of reserves can always borrow from the RBI at the MSF against its SLR securities, so no bank pays more.
So the mid-2026 corridor is SDF 5.00%, repo 5.25%, MSF 5.50%, a 50-bp band, and the overnight rate is trapped inside it by arbitrage. The RBI steers where inside the corridor the rate sits by managing the quantity of liquidity via variable-rate repo (VRR, injects) and variable-rate reverse-repo (VRRR, drains) auctions and OMOs. This is the move the newspaper misses: the RBI can tighten or ease at the margin without touching the repo by draining or adding liquidity, nudging the overnight rate up toward the repo or down toward the SDF. The analyst reads the liquidity stance (surplus or deficit, and by how many lakh crore) alongside the headline rate.
What are the CRR and the SLR?
The two India-specific ratios: CRR and SLR. Every Indian bank must pre-commit a slice of its deposits (net demand and time liabilities, NDTL) before it can lend a rupee to a business:
- The CRR (Cash Reserve Ratio): a fraction held as non-interest-bearing cash at the RBI (~3–4% as of mid-2026, check; the RBI announced a phased cut toward 3% in 2025). It is a liquidity/transmission tool and a tax on banks (idle cash earning nothing); a CRR cut directly lifts bank net interest margins (M5.01) by turning dead cash into lendable funds.
- The SLR (Statutory Liquidity Ratio): ~18% held in approved liquid assets, overwhelmingly government securities. This looks like a prudential rule but is one of the most important structural facts about Indian finance: it makes the banking system a captive, legally-mandated buyer of government debt, holding down the government's borrowing cost. That is a form of financial repression, and it is central to the fiscal-resilience story in India's fiscal deficit. Together, CRR + SLR lock up ~21–22% of every deposit rupee before commercial lending begins, which is why the Indian bank credit-to-deposit ratio's comfort zone is ~75–85%, not 100% (M5.01).
How does inflation targeting work in India?
The framework: flexible inflation targeting (FIT). Since 2016 the RBI has run a formal inflation-targeting framework, and its design is worth knowing cold because it is examined and because it shapes behaviour:
- The Government of India, in consultation with the RBI, sets the target every five years. The current target is 4% headline CPI with a ±2% tolerance band (2–6%). Mark this "verify," because the framework was up for its five-yearly renewal around 2026 and the number could change; pull the current target from the RBI's Monetary Policy Framework page.
- It targets headline CPI, the whole basket with food and fuel included, not core. This is deliberate and much-debated (M7.03): Indian households experience food inflation viscerally (food is ~46% of the CPI basket versus a much smaller weight in the US), and inflation expectations are set by the onion-and-tomato prices households actually see. The cost is that the RBI's target variable is buffeted by monsoon-driven food shocks it cannot control with interest rates, a genuine design tension.
- There is a hard accountability clause: if average CPI breaches the 2–6% band for three consecutive quarters, the RBI has "failed" and must write a formal letter to the government explaining why, what it will do, and how long the fix will take. This actually happened in 2022. The clause is what gives the target teeth and credibility, and credibility is the whole point of an inflation target (M7.02 §4.9, the time-inconsistency argument).
Who sits on the Monetary Policy Committee?
The committee: the MPC. Six members meet bi-monthly, six times a year: three from the RBI (the Governor as chair, the Deputy Governor for monetary policy, one RBI officer) and three external members appointed by the government. The Governor has a casting vote in a tie. The vote and each member's rationale are published in the minutes ~14 days later. The structural point for an analyst is the one from M7.02: the split is information. A 4–2 vote to hold with two members dissenting for a cut tells you the next move's likely direction and that it is close, which is worth more than the decision itself. And because the government appoints half the committee and sets the target, India's central-bank-independence question (M7.02 §4.9) is concrete, not abstract; the analyst watches the RBI–government relationship as a genuine variable.
How do you read an MPC decision?
How to read a live MPC decision (the India checklist). When the resolution drops, in order: (1) the repo decision versus what was priced (a "hawkish hold" or "dovish cut" is about the surprise, M7.05); (2) the stance ("accommodative / neutral / withdrawal of accommodation") and whether it shifted (a stance change often out-signals the rate); (3) the vote split; (4) the RBI's own CPI and GDP projections (its forecast path is its real forward guidance); (5) the liquidity stance (are they in surplus and injecting, or draining?); and (6) the Governor's tone on growth-versus-inflation. Then translate to markets: what does this do to the 10-year G-sec, to bank margins, and to the discount rate under Indian equities?