At a glance
India’s inflation target, set by law, run by a committee
Created
2016, under an amended RBI Act, 1934.
Six members
3 from RBI, 3 outside experts named by government.
Target
4% CPI inflation, with a 2%-6% tolerance band.
Chair
The RBI Governor, who also holds the tie-breaking vote.
On this page
What the MPC actually does
One job: set the repo rate to control inflation
The Monetary Policy Committee (MPC) is a 6-member panel. It meets several times a year. Its job is to decide India’s repo rate — the interest rate at which the RBI lends short-term funds to banks.
Changing this one rate ripples outward. When the MPC raises it, loans across the economy get costlier, people borrow and spend less, and inflation tends to cool down. When it cuts the rate, borrowing gets cheaper, spending picks up, and growth gets a push.
Worked example: Suppose vegetable and fuel prices are rising fast, pushing inflation above 6%. The MPC can raise the repo rate. Home loans, car loans, and business loans all get more expensive. People borrow less and spend less. Demand cools, and price rises slow down over time.
Remember: The MPC does not fix prices directly. It only changes one interest rate, and lets that ripple through the economy — a slow, indirect lever, not a direct switch.
Q1. True or False: The Monetary Policy Committee controls inflation mainly by changing the repo rate, not by directly setting prices.
Where this idea came from
One expert committee’s report became a law
Before 2016, one person decided India’s key interest rate: the RBI Governor. An RBI expert panel, the Urjit Patel Committee, was set up in 2013. Its January 2014 report said this should change. It argued for two things. First, a committee should decide, not one person. Second, that committee should chase one clear, public inflation number.
Parliament agreed. The Finance Act, 2016 amended the old RBI Act, 1934. This created the MPC as a real legal body, under Section 45-ZB of the Act. It is not just an internal RBI habit that could quietly change.
Before 2016
RBI Governor alone set the key rate
Urjit Patel Committee
2014: report recommends a committee + public target
2016
MPC created by law, under RBI Act Section 45-ZB
Who’s actually on the committee
Three insiders, three outsiders
The MPC has exactly six members:
- Three from the RBI: the Governor (who chairs the committee), a Deputy Governor, and one other RBI official.
- Three external members: economists or experts, chosen by the central government, who do not work for the RBI.
Every member gets one vote. If the panel ties 3-3, the Governor’s vote counts twice — settling the tie.
Exam point: The external members are what makes this a genuine committee decision. Without them, it would just be the RBI marking its own homework. That was a deliberate design choice, straight from the Urjit Patel Committee’s report.
Q2. True or False: All six MPC members are officials who work for the RBI.
The target, and what counts as failure
4%, give or take 2 points — stay above 6% or below 2% for three quarters running, and RBI must explain itself
The government sets India’s inflation target once every five years. It does this together with the RBI, not alone. Since 2016, the target has stayed the same: 4% CPI inflation, with room to move between 2% and 6%. This target was renewed again, unchanged, for 2026-2031.
What if inflation drifts outside that 2%-6% band? One bad quarter is not a problem. Failure has two forms. Average inflation must stay above 6% for three quarters in a row, or below 2% for three quarters in a row. Inflation that swings above and then below the band does not count. Once failure happens, the RBI must send a report to the government. It must explain why it missed the target, what it will do next, and roughly how long a fix will take.
Worked example: Imagine average inflation is 7% in each of three quarters in a row. That is above the 6% ceiling every time. This triggers the failure clause. The RBI can’t just quietly move on; it owes the government (and, in effect, the public) a formal explanation and a plan.
Q3. True or False: If average inflation stays above the 6% upper limit for three straight quarters, the RBI must send the government a report on why it failed.
The distinction examiners keep testing
MPC questions usually test whether you actually know the mechanics, not just the buzzwords:
- Committee vs. Governor alone: before 2016, one person decided; now six people vote, with the Governor breaking ties.
- The exact numbers: the target is 4%, the band is 2%-6%, and failure needs average inflation above 6%, or below 2%, for three consecutive quarters — not one bad month.
- MPC vs. RBI generally: the MPC sets the repo rate. The RBI as a whole does much more — currency, banking regulation, forex — but only the MPC handles this specific rate decision.
Where the inflation target stands now
RBI curbs forex speculation and tightens liquidity, October 2026
[Policy] In October 2026, the RBI cut the limit for forex derivative deals without underlying exposure from $100 million to $5 million. It also set up a Foreign Exchange Risk Reserve. Banks must hold cash equal to 20% of qualifying hedge contracts above $2 million. (Source: All India Radio.)
From 16 October 2026, banks must maintain 99% of the required CRR daily, up from 90%. Surplus liquidity was about ₹3.88 lakh crore on 8 October. The move drains liquidity after the repo rate hike. (Source: All India Radio.)
Repo rate raised to 5.50%; stance turns to calibrated tightening, 7 October 2026
[Policy] At its 5-7 October 2026 meeting, the MPC voted unanimously to raise the repo rate by 25 bps to 5.50%. The SDF rate is now 5.25%. The MSF rate and Bank Rate are 5.75%. (Source: RBI.)
The MPC also changed its stance to calibrated tightening. It means rate cuts are off the table in the near term. The next move can only be a hike or a pause. Two members, Dr. Nagesh Kumar and Prof. Ram Singh, wanted the stance kept at neutral. (Source: RBI.)
Why now? CPI inflation rose to 4.8% in August 2026 from 4.5% in July. A deficient monsoon, El Niño and high energy prices add pressure. RBI projects FY27 CPI inflation at 5.2% and real GDP growth at 7.1%. The next meeting is on 2-4 December 2026. (Source: RBI.)
Repo rate held at 5.25%, 5 August 2026
[Policy] At its 3-5 August 2026 meeting, the MPC voted unanimously to keep the repo rate at 5.25%. The stance stayed neutral. The MPC raised its FY27 GDP growth forecast to 6.7%, from 6.6%. It cut its CPI inflation projection to 5%, from 5.1%. (Source: Forbes India.)
The 4% target renewed for 2026-2031
The government kept the 4% inflation target unchanged, with the same 2%-6% band. This covers the next five-year cycle, from 1 April 2026 to 31 March 2031. It’s the second such renewal since the framework began in 2016.
India’s retail inflation stayed close to the target through early 2026. That gave the MPC room to focus on growth, instead of fighting runaway prices.
Figures current as of the 2026-2031 target renewal — re-verify against the latest RBI/government announcement before treating this as unchanging.
Quick Q&A
What is the MPC’s single most important tool?
The repo rate — the interest rate at which RBI lends short-term money to commercial banks.
Who has the tie-breaking vote on the MPC?
The RBI Governor, who chairs the committee and casts a second vote if the panel splits 3-3.
What inflation measure does the MPC target?
CPI (Consumer Price Index) inflation — not WPI, which tracks wholesale prices instead.
What happens if the RBI misses its inflation target?
If average inflation stays above 6% or below 2% for three straight quarters, it must send the government a report. The report gives the reasons, the fixes it proposes, and the time it expects to need.
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