On February 7, 2025, six people sat in a room at the Reserve Bank of India's headquarters in Mumbai and voted to reduce the policy repo rate by 25 basis points to 6.25 per cent. The Monetary Policy Statement, 2024-25 — Resolution of the MPC, February 5 to 7, 2025 (PR_59692) recorded the decision. The Minutes of that meeting (PR_59818) revealed the reasoning of each member. Within a week, every home loan in the country linked to the repo rate started adjusting downward. For a borrower with a Rs 50 lakh home loan, that single vote translated into a reduction of roughly Rs 850 in the monthly EMI.
How does a vote by six people in Mumbai change what a borrower in Chennai pays? The answer involves a transmission chain that India spent twenty years trying to build — and that only started working properly in October 2019.
See also: Interest Rate Policy: The Complete Timeline | From MCLR to EBLR: Why Your Home Loan Rate Finally Moves With the Repo | The Interest Rate Chain: From Repo to Savings Account
Who are the six people who set the repo rate?
The Monetary Policy Committee was established under Section 45ZB of the Reserve Bank of India Act, 1934, inserted by the Finance Act, 2016. It has six members: three from the RBI (the Governor, a Deputy Governor, and one RBI officer nominated by the RBI Board) and three external members appointed by the central government.
Why three external members? Because the history of monetary policy in India — and in most countries — shows that central banks face constant political pressure to keep rates low. Low rates stimulate borrowing, boost consumption, and make governments look good in the short term. High rates restrain inflation but slow growth and make the government unpopular. Without external members, the argument goes, the RBI might bow to implicit government pressure on rate decisions. The three external members — typically academics or economists with no institutional loyalty to either the RBI or the government — provide an independent voice.
The Committee meets six times a year, roughly every two months. The Meeting Schedule for 2025-2026 (PR_60062) published the dates in advance. Each meeting lasts three days. On the final day, the Committee votes. The Governor has a casting vote in case of a tie — a provision that has not yet been used, because the six-member committee has always produced a majority.
"Monetary Policy Statement, 2025-26 — Resolution of the Monetary Policy Committee, February 4 to 6, 2026." — MPC Resolution, February 2026 (PR_62169)
The February 2026 meeting continued the easing cycle that began in February 2025. The Minutes of the February 2026 meeting (PR_62261) revealed the individual reasoning of each member, including areas of disagreement on the pace and magnitude of cuts.
What does the repo rate actually do?
The repo rate is the rate at which the RBI lends overnight money to banks against government securities collateral. When the RBI sets the repo rate at 6.25%, it means banks can borrow funds from the RBI for one day at 6.25% per annum, provided they pledge government bonds as collateral.
Why does this matter? Because the repo rate sets the floor for the entire interest rate structure. If a bank can borrow from the RBI at 6.25%, it will not pay more than 6.25% for overnight funds in the interbank market. The interbank rate anchors the bank's cost of short-term funds, which feeds into its marginal cost of deposits, which determines its lending rate.
The Liquidity Adjustment Facility — Repo and Reverse Repo Rates circular of February 2019 is one of dozens of such circulars the RBI issues after every rate decision — operationalising the MPC's vote into a change in the rate at which the LAF window operates. Every rate change produces such a circular: the April 2019 cut to 6.00%, the June 2019 cut to 5.75%, the August 2019 cut to 5.40%, the October 2019 cut to 5.15% — five consecutive cuts in 2019, each one a separate circular translating an MPC vote into an operational instruction.
"Liquidity Adjustment Facility — Repo and Reverse Repo Rates." — LAF Rate Circular, February 2019
The COVID-19 period showed how aggressively the repo rate can move. The March 2020 emergency cut dropped the rate by 75 basis points in one shot — the largest single cut in decades. The April 2020 reverse repo cut targeted the reverse repo rate separately, widening the corridor to incentivise banks to lend rather than park money with the RBI. The May 2020 cut RBI/2019-20/237 took the repo rate to 4% — its lowest level ever.
Why did the transmission chain break — and how was it fixed?
For years, the RBI cut the repo rate and banks barely moved their lending rates. The problem was methodological. Under the Base Rate system introduced in April 2010 RBI/2009-10/390 (since withdrawn), each bank calculated its own Base Rate using its average cost of funds. When the RBI cut the repo rate, the bank's marginal borrowing cost dropped — but its average cost (weighted by all the fixed-rate deposits it had already taken) barely moved. Banks had no incentive and no obligation to recalculate quickly.
The MCLR (Marginal Cost of Funds Based Lending Rate), introduced in April 2016 through the Master Direction on Interest Rate on Advances (Master Direction - Reserve Bank of India (Interest), replaced the Base Rate system outright — banks could no longer use the old average-cost methodology for new loans. MCLR tried to fix the transmission problem by mandating that banks use marginal cost — the cost of new deposits — rather than average cost. In theory, this should have made lending rates more responsive. In practice, banks gamed the marginal cost calculation, choosing deposit tenors and weightings that minimised the impact of repo rate cuts on their MCLR.
The fix that actually worked was blunt: the External Benchmark Based Lending circular RBI/2019-20/53 (since withdrawn) of September 2019, effective October 1, 2019. This circular mandated that all new floating rate retail and MSME loans be linked to an external benchmark — the repo rate, the 3-month T-bill yield, the 6-month T-bill yield (since withdrawn), or any other benchmark published by FBIL. Banks could add a spread, but the spread could not be increased except for credit risk deterioration.
"All new floating rate personal or retail loans and floating rate loans to Micro and Small Enterprises extended by banks from October 01, 2019 shall be benchmarked to one of the following: (i) Reserve Bank of India policy repo rate." — External Benchmark Lending, September 2019 RBI/2019-20/53 (since withdrawn)
Why did this work when MCLR did not? Because the bank lost discretion over the benchmark. Under MCLR, the bank chose its own inputs and methodology. Under EBLR, the benchmark is the repo rate — a number set by the MPC, published by the RBI, visible to everyone. When the repo rate drops by 25 basis points, the lending rate drops by 25 basis points at the next reset date. The bank cannot game what it does not control.
The February 2020 extension to Medium Enterprises RBI/2019-20/167 (since withdrawn) brought medium enterprises into the EBLR framework as well, completing the chain for the MSME sector.
What is the inflation targeting mandate — and why does 4% matter?
The RBI's primary objective, as defined by the Monetary Policy Framework Agreement of February 2015 and subsequently legislated through the RBI Act amendment in 2016, is to maintain CPI inflation at 4% with a tolerance band of +/- 2%. If inflation exceeds 6% for three consecutive quarters, the MPC must explain its failure to the government in writing.
Why 4%? The number was the product of negotiation between the RBI and the government, informed by the Urjit Patel Committee (2014) recommendations. The committee argued that an emerging economy like India cannot target 2% like the US or Europe — structural factors (supply chain inefficiencies, food price volatility, wage growth) push Indian inflation higher. But targeting 6% or 8% would embed inflationary expectations and erode purchasing power of the poor. The 4% target was a compromise: ambitious enough to anchor expectations, flexible enough to accommodate supply shocks.
The Discussion Paper on Review of Monetary Policy Framework (PR_61067), released in August 2016, had invited public comments on the framework before it was legislated. The 4% target has since been renewed: in 2021, the government confirmed the same target for another five years, through March 2026.
Why does the mandate matter for interest rate policy? Because it constrains the MPC's discretion. When inflation is rising toward 6%, the MPC must tighten — even if the government wants lower rates to boost growth. When inflation is falling below 4%, the MPC has room to cut — even if fiscal hawks worry about excess liquidity. The mandate converts the rate decision from a judgment call into a framework-driven response.
What happens when MPC members disagree — and why does transparency matter?
Every MPC meeting produces two documents: the Resolution (the decision and the rationale) and the Minutes (individual member statements and votes). The minutes are published two weeks after the decision. Each member records whether they voted for a cut, a hold, or a hike — and why.
The Minutes of the October 2024 meeting (PR_58958) showed unanimous agreement. The Minutes of the December 2024 meeting (PR_59347) revealed growing debate about the timing of rate cuts as growth slowed. The April 2025 resolution (PR_60176) and the June 2025 resolution (PR_60604) continued the easing cycle, with minutes showing how the debate evolved.
"Monetary Policy Statement, 2025-26 — Resolution of the Monetary Policy Committee, August 4 to 6, 2025." — MPC Resolution, August 2025 (PR_60957)
Why does this transparency matter? Because markets react not just to the rate decision but to the reasoning behind it. A unanimous 5-1 vote to hold rates steady sends a different signal than a 4-2 vote. A member statement flagging concern about food inflation tells markets that a rate hike might be coming — even if the current meeting decided to hold. The minutes are forward guidance in disguise. The August 2025 minutes (PR_61056) and the October 2025 resolution (PR_61332) continued this practice of granular disclosure.
Before the MPC, India's monetary policy was decided by the RBI Governor alone. The Governor consulted a Technical Advisory Committee, but the final decision was one person's call. The MPC replaced personal judgment with institutional deliberation, individual accountability through published votes, and constraints through the inflation target. The DRG Study on Monetary Policy Transmission and Labour Markets (PR_58797) examined how effectively this new framework transmits policy intentions to the real economy.
How does the rate decision reach your EMI — step by step?
Here is the complete chain, as it works since October 2019:
The MPC votes to cut the repo rate by 25 bps. The RBI issues a LAF circular operationalising the new rate. Banks' overnight borrowing cost from the RBI drops by 25 bps. The repo rate — the external benchmark — drops. Every home loan, auto loan, and MSME loan linked to the repo rate adjusts at its next reset date (typically every three or six months, as specified in the loan agreement). The borrower's EMI declines.
The chain has one critical break point: the spread. Banks can set any spread above the external benchmark. If the repo rate is 6.25% and the bank's spread for home loans is 2.50%, the lending rate is 8.75%. When the repo rate drops to 6.00%, the lending rate drops to 8.50% — automatically, without the bank needing to do anything. But the bank has discretion to change the spread itself. The EBLR framework restricts this: the spread cannot increase except for credit risk deterioration. But the initial spread the bank sets when it originates the loan is entirely within its discretion.
Why does this residual discretion matter? Because it means the benchmark is transparent but the total rate is not. Two banks offering repo-linked home loans might charge very different rates — not because the benchmark differs, but because their spreads do. The transparency that EBLR brought was real but partial. The December 2025 MPC resolution (PR_61749) and the December 2025 minutes (PR_61856) continued the easing cycle, with each cut flowing directly to borrowers in a way that was impossible under the old regime.
The journey from six people in a room to your monthly EMI took India two decades of failed experiments to build. It works now. Whether it continues to work depends on whether the institutional framework — the MPC's independence, the inflation target, the EBLR mandate — survives the next political cycle.
Last updated: April 2026