RBI ANNUAL REPORT 2025-26
CHAPTER III: MONETARY POLICY OPERATIONS
1. Monetary Policy Overview
During
2025-26, the MPC continued the easing cycle begun in February 2025. The policy
repo rate was reduced by a cumulative 100 bps during the financial year to
5.25%. The stance moved from neutral to accommodative in April 2025 and back to
neutral in June 2025. Policy support combined rate cuts, CRR reduction and
durable liquidity injections, improving credit offtake and transmission.
The
Department agenda covered review of the monetary policy framework, assessment
of optimal system liquidity, spatial and cross-sectional analysis of household
consumption expenditure using NSS data, and strengthening data collection on
credit deployment of non-bank financial companies/HFCs.
2. Implementation Status and Flexible Inflation
Targeting
A
review paper on the monetary policy framework was published on August 21, 2025.
The Central Government notification dated March 25, 2026 retained the CPI
headline inflation target at 4%, with an upper tolerance limit of 6% and lower
limit of 2%, for April 1, 2026 to March 31, 2031.
The
Flexible Inflation Targeting framework was formally adopted in May 2016.
Section 45ZA of the RBI Act, 1934 provides the statutory basis for the Central
Government, in consultation with RBI, to determine the CPI inflation target
every five years. The 2025-26 second review discussion paper sought feedback on
the anchor, numerical target, tolerance band and point versus range target.
The
consultation broadly supported retention of the existing framework. The
response chart recorded 92% support for headline CPI over core, 90% for
retaining the 4% target, 65% for retaining the ±2% tolerance band, and 93% for
a point target.
EXAM
ALERT: FIT target = 4%, tolerance band = 2%-6%, review
period = April 1, 2026 to March 31, 2031. Do not confuse the statutory target
with the tolerance limits.
3. MPC Decisions and Macroeconomic Projections
February
2025 began the easing cycle. The document notes a cumulative 125 bps reduction
in the repo rate between February and December 2025, while the fiscal-year
reduction in 2025-26 was 100 bps, ending at 5.25%.
April
2025: repo cut 25 bps; stance changed to accommodative. Real GDP growth for
2025-26 was projected at 6.5%, with CPI inflation at 4.0% and quarterly
projections of 3.6%, 3.9%, 3.8% and 4.4%.
June
2025: repo cut 50 bps to 5.50%; stance returned to neutral. CPI projection for
2025-26 was revised to 3.7%, with quarterly projections 2.9%, 3.4%, 3.9% and
4.4%.
October
2025: repo retained at 5.50% and neutral stance retained. Full-year real GDP
growth was revised to 6.8%; CPI for 2025-26 was projected at 2.6%, with Q2
1.8%, Q3 1.8% and Q4 4.0%.
December
2025: Q2 real GDP growth was 8.2%; 2025-26 GDP projection was revised to 7.3%.
Headline inflation averaged 1.7% in Q2. Repo was cut 25 bps to 5.25% and stance
remained neutral.
The
February 2026 MPC retained the policy rate at 5.25% and continued the neutral
stance. The document notes that one member preferred an accommodative stance on
some occasions during the year, while June 2025 recorded the main divergence on
the size of the cut.
4. Operating Framework and Liquidity Management
Liquidity
pressures arose mainly from volatile capital flows and higher currency in
circulation. RBI used term repo, OMOs, long-term forex swaps and CRR reduction.
The operating framework retained WACR as the operating target with a symmetric
50 bps corridor around the repo rate. The 14-day VRR/VRRR auctions were
discontinued as the main liquidity operations and 7-day and other tenor
variable-rate repo/reverse repo auctions were used more actively.
Major
liquidity drivers were changes in Government cash balances, expansion in
currency in circulation and volatile capital flows. RBI said withdrawals from
currency demand and forex operations were more than offset by durable liquidity
augmentation.
Average
daily system liquidity surplus was ₹1.86 lakh crore in 2025-26. SDF accounted
for 84.9% of average total absorption under the LAF, equal to ₹2.02 lakh crore,
while MSF absorption averaged ₹2.38 lakh crore. In Q1, average daily net LAF
absorption was ₹2.03 lakh crore. Daily VRR auctions were discontinued from June
11, 2025; VRRR auctions resumed on June 27, 2025 after a gap of nearly eight
months.
Q2
saw a short liquidity deficit during September 22-24, 2025. RBI conducted 22
VRRR and 14 VRR operations in Q2. In Q3, average net absorption under LAF
declined to ₹1.21 lakh crore and 26 VRR operations were conducted. In Q4, 18
VRR operations addressed intermittent tightness and RBI conducted two OMO
purchase tranches of ₹50,000 crore each on March 9 and March 13, 2026,
totalling ₹1 lakh crore.
|
Key durable liquidity injection measures |
Amount (₹ crore) |
|
April
2025: OMO purchases, term VRR |
1,20,000 +
25,731 |
|
May 2025:
OMO purchases |
1,19,203 |
|
Sept-Nov
2025: CRR cuts |
2,50,000* |
|
Dec 2025:
OMO purchases + forex swap |
1,50,000 +
46,147* |
|
Jan 2026:
OMO purchases + forex swap + term VRR |
2,00,000 +
90,304* + 1,36,504 |
|
Feb 2026:
OMO purchases + forex swap |
50,000 +
90,434* |
|
Mar 2026:
OMO purchases |
1,00,000 |
|
Total |
13,78,323 |
EXAM
ALERT: Table III.2 total durable liquidity injection
measures = ₹13,78,323 crore. OMO purchases in March 2026 = ₹1,00,000 crore in
two equal tranches of ₹50,000 crore.
5. Interest Rates and Monetary Transmission
WACR
remained broadly within the LAF corridor. On average in 2025-26 it was 7 bps
below the policy repo rate, compared with 6 bps above the repo rate in the
preceding year. The 3-month T-Bill yield moderated; CD and CP rates also
moderated up to Q3 before hardening in Q4.
In
response to the cumulative 100 bps repo reduction during 2025-26, SCBs reduced
WADTDRs on fresh and outstanding deposits by 65 bps and 49 bps, respectively.
WALR on fresh and outstanding SCB rupee loans declined by 95 bps and 78 bps.
|
Transmission indicator |
2025-26 change |
|
Policy
repo rate |
-100 bps |
|
Fresh
deposit WADTDR |
-65 bps |
|
Outstanding
deposit WADTDR |
-49 bps |
|
Fresh
rupee-loan WALR |
-95 bps |
|
Outstanding
rupee-loan WALR |
-78 bps |
|
Fresh
EBLR-linked loan benchmark |
-100 bps
in the table |
EBLR-linked
lending expanded. As of December 2025, EBLR-linked loans accounted for 50.6% of
PSBs’ and 89.2% of PVBs’ outstanding floating-rate loans. The higher EBLR share
in PVBs contributed to faster transmission in outstanding loan rates.
For
fresh rupee loans, WALR moderation during 2025-26 was broad based, with the
largest decline in rupee export credit, followed by education, professional
services, MSMEs, trade, large industry and housing. For outstanding loans, the
largest decline was in trade, followed by housing and education.
|
Fresh rupee loan WALR, March 2026 |
Rate (%) |
|
Agriculture |
9.81 |
|
Large
industry |
7.41 |
|
MSMEs |
8.72 |
|
Infrastructure |
7.76 |
|
Trade |
7.51 |
|
Professional
services |
8.15 |
|
Housing |
7.63 |
|
Vehicle |
9.57 |
|
Education |
9.14 |
|
Other
personal loans |
10.07 |
|
Rupee
export credit |
6.78 |
6. Agenda for 2026-27 and Conclusion
·
Strengthen macroeconomic
forecasting, GDP growth forecasting and inflation forecasting.
·
Improve sectoral credit
deployment analysis including non-bank sources.
·
Estimate the natural real rate
of interest and potential GDP/growth.
·
Review the quarterly
projection model.
Overall,
monetary policy remained growth supportive while balancing inflation and
external uncertainty. Rate cuts and liquidity measures helped transmission and
kept financial conditions conducive to credit.
PART 2: IMPORTANT NUMBERS
|
Topic |
Figure |
Meaning |
|
Repo rate
end-2025-26 |
5.25% |
Policy
repo rate after FY 2025-26 easing |
|
FY 2025-26
repo reduction |
100 bps |
Cumulative
reduction during financial year |
|
Feb-Dec
2025 repo reduction |
125 bps |
Cumulative
reduction across the meeting sequence noted in the chapter |
|
Inflation
target |
4% |
Headline
CPI target |
|
Tolerance
band |
2%-6% |
Lower and
upper limits |
|
FIT period |
Apr 1,
2026-Mar 31, 2031 |
Five-year
target period |
|
Average
system liquidity surplus |
₹1.86 lakh
crore |
2025-26
daily average |
|
Durable
liquidity measures |
₹13,78,323
crore |
Total in
Table III.2 |
|
WALR fresh
loans change |
-95 bps |
SCBs,
2025-26 |
|
WALR
outstanding loans change |
-78 bps |
SCBs,
2025-26 |
|
WADTDR
fresh deposits |
-65 bps |
SCBs,
2025-26 |
|
WADTDR
outstanding deposits |
-49 bps |
SCBs,
2025-26 |
|
PSB EBLR
share |
50.6% |
Outstanding
floating-rate loans, Dec 2025 |
|
PVB EBLR
share |
89.2% |
Outstanding
floating-rate loans, Dec 2025 |
PART 3: IMPORTANT DATES
|
Date / Year |
Event |
|
May 2016 |
FIT
framework formally adopted |
|
Feb 2025 |
Current
easing cycle initiated |
|
Apr 2025 |
25 bps
cut, stance moved to accommodative |
|
Jun 11,
2025 |
Daily VRR
auctions discontinued |
|
Jun 27,
2025 |
VRRR
auctions resumed |
|
Aug 21,
2025 |
Discussion/review
paper on monetary policy framework published |
|
Dec 2025 |
Repo cut
to 5.25%, stance neutral |
|
Mar 25,
2026 |
FIT target
framework retained for Apr 2026-Mar 2031 |
|
Mar 9
& 13, 2026 |
OMO
purchases of ₹50,000 crore each |
PART 4: IMPORTANT RBI / GOI / OTHER INITIATIVES
|
Initiative |
Organisation |
One-line purpose / key fact |
|
Flexible
Inflation Targeting |
RBI/GoI |
4%
headline CPI target with 2%-6% tolerance band, retained for 2026-31. |
|
OMO
purchases |
RBI |
Major
durable liquidity tool, including ₹1 lakh crore total in March 2026. |
|
CRR
reduction |
RBI |
Reduced
CRR in staggered manner during Sep-Nov 2025 to ease liquidity. |
|
EBLR
framework |
RBI/SCBs |
Strengthened
transmission, with high EBLR share especially in PVBs. |
|
Optimal
liquidity study |
RBI |
Department
study completed during 2025-26. |
|
Household
consumption analysis |
RBI/NSS
data |
Spatial
and cross-sectional analysis completed. |
PART 5: KEY DEFINITIONS / CONCEPTS
|
Term |
Meaning |
|
MPC |
Statutory
committee that decides the policy rate and monetary-policy stance under the
inflation-targeting framework. |
|
FIT |
Flexible
Inflation Targeting framework centred on a CPI inflation target with a
tolerance band. |
|
WACR |
Weighted
Average Call Rate, the operating target of monetary policy. |
|
LAF |
Liquidity
Adjustment Facility used for managing system liquidity through repo/reverse
repo operations and related facilities. |
|
WALR |
Weighted
Average Lending Rate. |
|
WADTDR |
Weighted
Average Domestic Term Deposit Rate. |
|
EBLR |
External
Benchmark-based Lending Rate. |
PART 6: CONFUSION POINTS
|
Confusion |
Correct distinction |
|
100 bps vs
125 bps repo cut |
100 bps is
the reduction during FY 2025-26; 125 bps refers to the cumulative
February-December 2025 sequence. |
|
Target vs
tolerance band |
4% is the
target; 2%-6% are the tolerance limits. |
|
Neutral vs
accommodative |
Stance
changed to accommodative in April 2025 and returned to neutral in June 2025. |
|
WACR vs
repo |
WACR is
the operating target and remained broadly within the LAF corridor. |
|
WADTDR vs
WALR |
WADTDR
relates to deposit rates; WALR relates to lending rates. |
PART 7: LAST-MINUTE EXAM FACTS
1.
Repo rate ended 2025-26 at 5.25%.
2.
FY 2025-26 repo reduction was 100 bps;
cumulative Feb-Dec 2025 reduction noted was 125 bps.
3.
FIT target retained at 4% with 2%-6% band for
April 1, 2026-March 31, 2031.
4.
April 2025 stance changed to accommodative;
June 2025 returned to neutral.
5.
June 2025 repo rate was brought to 5.50% after
a 50 bps cut.
6.
December 2025 repo rate was reduced by 25 bps
to 5.25%.
7.
Average daily system liquidity surplus was
₹1.86 lakh crore.
8.
SDF accounted for 84.9% of average total LAF
absorption, ₹2.02 lakh crore.
9.
Daily VRR auctions were discontinued from June
11, 2025; VRRR resumed June 27, 2025.
10.
Two March 2026 OMO tranches of ₹50,000 crore
each totalled ₹1 lakh crore.
11.
Total durable liquidity injection measures in
Table III.2 were ₹13,78,323 crore.
12.
Fresh and outstanding deposit rates fell 65 and
49 bps.
13.
Fresh and outstanding loan WALRs fell 95 and 78
bps.
14.
EBLR-linked floating-rate loan share in Dec
2025 was 50.6% for PSBs and 89.2% for PVBs.
15.
March 2026 fresh WALR on rupee export credit
was 6.78%, the lowest among sectors in Table III.6.
16.
Outstanding March 2026 WALR on other personal
loans was 10.63%, the highest among listed sectors in Table III.7.
17.
The operating corridor was symmetric at 50 bps
around the repo rate.
18.
The chapter concludes that monetary policy
remained growth supportive while reinforcing the growth-inflation balance.