The RBI Annual Report FY 2025-26 presents 2025-26 as a year in which monetary policy moved decisively into an easing phase as headline inflation fell sharply, while the Reserve Bank simultaneously remained attentive to growth, liquidity, financial conditions and external risks. During the year, the MPC reduced the policy repo rate by 100 basis points, taking it to 5.25%, changed the stance from neutral to accommodative in April and then returned to a neutral stance in June. The year also saw a major review of India’s Flexible Inflation Targeting framework, with the Government ultimately retaining the 4% CPI inflation target with a 2–6% tolerance band for 2026-31.
For RBI Grade B Promotion Exam, RBI Grade B, UPSC, banking examinations and interviews, this chapter is particularly important because it connects three subjects that are often tested separately:
Inflation → MPC decision → Repo rate/liquidity → Transmission → Growth
Understanding that chain is much more valuable than memorising individual rate announcements.
1. Monetary Policy in 2025-26: The Big Picture
The RBI Annual Report identifies three defining features of monetary policy during 2025-26:
- Sharp moderation in headline CPI inflation
- A cumulative 100 bps reduction in the repo rate
- A combination of rate cuts, CRR reduction and durable liquidity measures
Headline inflation declined largely because of food price deflation and reached an all-time low in the old CPI series in October 2025. Against this backdrop, the MPC continued the easing cycle that had begun in February 2025.
The key rate trajectory
| Period | Repo-rate action | Repo rate after decision | Stance |
|---|---|---|---|
| April 2025 | -25 bps | 5.75% | Accommodative |
| June 2025 | -50 bps | 5.50% | Neutral |
| August 2025 | No change | 5.50% | Neutral |
| October 2025 | No change | 5.50% | Neutral |
| December 2025 | -25 bps | 5.25% | Neutral |
| February 2026 | No change | 5.25% | Neutral |
Exam trap: The Annual Report states that the repo rate was reduced by 100 bps during FY 2025-26. However, the broader easing cycle from February to December 2025 involved a cumulative 125 bps reduction. Do not confuse these two numbers.
2. Why Did RBI Cut the Repo Rate?
The fundamental reason was the changing growth-inflation balance.
At the beginning of the financial year, inflation was declining rapidly while growth was still viewed as recovering. This created policy space for monetary easing.
The April MPC meeting therefore judged that:
- domestic economic activity was improving;
- manufacturing was reviving;
- rural demand was strong;
- urban consumption was gradually recovering;
- food-price moderation was pulling headline inflation down;
- inflation appeared to be moving sustainably towards the 4% target.
Consequently, the MPC unanimously cut the repo rate by 25 bps and changed the stance from neutral to accommodative.
The policy logic
The chain can be remembered as:
Lower inflation
↓
Greater confidence that inflation will remain contained
↓
More room for monetary easing
↓
Lower borrowing costs / easier financial conditions
↓
Support to credit and economic activity
This is one of the most important conceptual chains for an examination.
3. April 2025 MPC Meeting
The first MPC meeting of FY 2025-26 was held in April 2025.
Growth outlook
The RBI projected real GDP growth for 2025-26 at:
6.5%
The domestic economy was supported by manufacturing recovery, strong rural demand and gradual improvement in urban consumption.
Inflation outlook
The CPI inflation projection for 2025-26 was:
4.0%
Quarterly projections were:
- Q1: 3.6%
- Q2: 3.9%
- Q3: 3.8%
- Q4: 4.4%
The assumption of a normal monsoon was an important part of this outlook.
Decision
The MPC:
- reduced repo rate by 25 bps;
- moved from neutral → accommodative;
- voted unanimously.
Exam Point
April 2025 = 25 bps cut + accommodative stance.
4. June 2025: The Biggest Rate Cut of the Year
June was the most aggressive policy action of FY 2025-26.
Inflation projections were revised downward because headline inflation continued to moderate on the back of softer food inflation.
Revised inflation projection
The FY 2025-26 CPI projection was reduced by 30 bps:
4.0% → 3.7%
Quarterly projections:
- Q1: 2.9%
- Q2: 3.4%
- Q3: 3.9%
- Q4: 4.4%
The GDP growth projection remained at 6.5% despite trade-policy uncertainty.
The decision
The MPC cut the repo rate by:
50 bps
bringing it from:
6.00% → 5.50%
This decision was taken by a 5–1 majority.
One member preferred a smaller 25 bps cut.
At the same time, the MPC changed the stance:
Accommodative → Neutral
Why?
Because after cumulative cuts of 100 bps since February 2025, the MPC acknowledged that policy space for further rate cuts had become limited.
Exam Point
June 2025 = 50 bps cut + repo 5.50% + neutral stance + 5–1 vote.
This is probably the single most important MPC meeting to memorise from the year.
5. August 2025: Pause Despite Lower Inflation
By August, the inflation picture had become even more favourable.
Headline CPI inflation had declined for the eighth consecutive month.
The RBI cited:
- favourable south-west monsoon;
- strong kharif sowing;
- adequate foodgrain stocks;
- softer food prices.
The FY 2025-26 CPI inflation projection was revised down by a substantial 60 bps:
3.7% → 3.1%
The quarterly projections were:
- Q2: 2.1%
- Q3: 3.1%
- Q4: 4.4%
Yet the MPC did not cut the repo rate.
The repo rate remained:
5.50%
and the stance remained:
Neutral
The decision was unanimous.
Why did RBI pause?
This is an important conceptual question.
Lower inflation does not automatically mean the RBI must cut rates at every meeting.
The MPC also considered:
- tariff uncertainties;
- the global growth environment;
- fading global disinflation momentum;
- rising core inflation;
- the transmission of earlier policy measures.
Core inflation had risen to 4.4% in June 2025, partly reflecting higher gold prices.
Therefore:
Inflation falling ≠ automatic rate cut.
The MPC evaluates the overall growth-inflation outlook, not one indicator in isolation.
6. October 2025: Growth Improves, Repo Rate Stays at 5.50%
The October meeting brought an important change in the growth outlook.
Real GDP had grown:
7.8% in Q1:2025-26
The FY 2025-26 GDP growth projection was consequently revised upward:
6.5% → 6.8%
Inflation remained exceptionally subdued.
The CPI inflation projection was revised further down:
3.1% → 2.6%
Quarterly projections:
- Q2: 1.8%
- Q3: 1.8%
- Q4: 4.0%
- Q1:2026-27: 4.5%
MPC decision
Despite lower inflation, the MPC kept:
- Repo rate: 5.50%
- Stance: Neutral
The rate decision was unanimous.
However, the stance decision reflected some divergence: two members preferred changing the stance to accommodative.
The important lesson
By October, the policy problem was no longer simply:
“Inflation is high, therefore tighten.”
Instead, it was becoming:
“Inflation is very low, growth is resilient, but how much additional monetary easing is appropriate?”
That is the essence of data-dependent monetary policy.
7. December 2025: Another 25 bps Cut
December was another important turning point.
The RBI described the domestic situation as a rare “Goldilocks” period.
Why?
Because:
- Q2 GDP growth reached 8.2%;
- headline inflation averaged only 1.7%;
- inflation was below the lower tolerance limit of 2%;
- global economic conditions were better than expected.
The GDP growth projection was revised upward again:
6.8% → 7.3%
For inflation, the projection was revised down:
2.6% → 2.0%
Q3 CPI inflation was projected at only:
0.6%
while Q4 was projected at:
2.9%
Decision
The MPC reduced the repo rate by:
25 bps
from:
5.50% → 5.25%
The stance remained:
Neutral
One member preferred an accommodative stance.
Exam Point
December 2025 = final rate cut of FY 2025-26.
8. February 2026: RBI Pauses Again
At the February 2026 meeting, the MPC concluded that the existing policy rate was appropriate.
The repo rate remained:
5.25%
The neutral stance was retained.
The MPC noted:
- near-term domestic inflation outlook was positive;
- growth remained resilient;
- November-December 2025 inflation remained below the tolerance band;
- Q1 and Q2 of 2026-27 had a benign inflation outlook;
- external headwinds had intensified.
The rate decision was unanimous, although one member favoured changing the stance to accommodative.
Thus, by the end of FY 2025-26, the RBI had reached a position where:
Repo = 5.25%
Stance = Neutral
and was prepared to respond to incoming information rather than commit itself to a predetermined future rate path.
9. How Unanimous Was the MPC?
This is a very useful objective-question area.
The RBI Annual Report states that MPC rate decisions during FY 2025-26 were characterised by unanimity except for the June 2025 meeting.
In June:
- majority: 50 bps cut
- one member: preferred 25 bps cut
The Annual Report explicitly characterises the MPC as remaining data driven in its decisions.
Quick memory table
| Meeting | Rate decision | Vote |
|---|---|---|
| April 2025 | -25 bps | Unanimous |
| June 2025 | -50 bps | 5–1 |
| August 2025 | No change | Unanimous |
| October 2025 | No change | Unanimous |
| December 2025 | -25 bps | Unanimous |
| February 2026 | No change | Unanimous |
10. Flexible Inflation Targeting Framework: The 2025-26 Review
One of the most important institutional developments under monetary policy was the second review of the Flexible Inflation Targeting (FIT) framework.
India formally adopted the FIT framework in May 2016 through amendments to the RBI Act.
The framework requires the Central Government, in consultation with the RBI, to determine the inflation target every five years. The target is expressed in terms of the Consumer Price Index (CPI).
The existing framework had:
- Target: 4%
- Lower tolerance: 2%
- Upper tolerance: 6%
Therefore:
Inflation target = 4% ± 2 percentage points
11. What Four Questions Were Asked in the FIT Review?
The RBI’s August 2025 Discussion Paper sought stakeholder feedback on four central issues:
1. Headline vs Core Inflation
Should the formal nominal anchor remain headline CPI, or should core inflation play a larger role?
2. Is 4% the Appropriate Target?
The review examined whether the existing 4% target remained appropriate.
3. Is the ±2% Band Appropriate?
The consultation considered whether the tolerance band should remain:
2%–6%
or be modified.
4. Point Target vs Range Target
The review also examined the relative merits of:
- a point target; versus
- a range target.
12. What Did Stakeholders Say?
The consultation produced broad support for continuation of the existing FIT framework.
There was strong support for:
Headline CPI as the formal inflation target.
Some respondents also supported using core inflation as a complementary guide, rather than necessarily replacing headline CPI as the formal target.
The responses also broadly supported retaining:
4% target
and the existing:
±2 percentage-point tolerance band.
About one-third of respondents favoured a narrower tolerance band, arguing that India’s policy credibility could be leveraged further.
13. Final Decision on India’s Inflation Target
After considering:
- empirical analysis;
- international/cross-country experience;
- stakeholder feedback;
- practical considerations,
the RBI submitted recommendations to the Government.
On March 25, 2026, the Government of India retained:
Inflation Target
4% headline CPI inflation
Upper Tolerance
6%
Lower Tolerance
2%
Applicable Period
April 1, 2026 to March 31, 2031
Exam Memory Formula
FIT 2026-31 = 4% target + 2% lower + 6% upper
or simply:
4 ± 2
14. Why Headline CPI Matters
A common examination mistake is to assume that because food prices are volatile, the RBI should formally target core inflation.
The Annual Report does not say that.
The review found strong support for retaining headline CPI as the formal target, while core inflation can serve as a complementary analytical guide.
This distinction is critical:
| Concept | Role |
|---|---|
| Headline CPI | Formal inflation target |
| Core inflation | Complementary analytical guide |
| 4% | Point target |
| 2–6% | Tolerance range |
15. Monetary Policy Was Not Just About the Repo Rate
Another major lesson from the RBI Annual Report FY 2025-26 is that monetary policy implementation involved more than the policy repo rate.
The RBI used a combination of:
- policy-rate reductions;
- CRR reduction;
- liquidity-management operations;
- durable liquidity-injection measures.
The objective was to maintain congenial financial conditions, facilitate credit growth and improve transmission.
The CRR was reduced by:
100 bps
to:
3.0% of NDTL
The reduction was implemented in a staggered manner during September-November 2025.
This is why Part 10 should not be remembered merely as:
“RBI cut repo by 100 bps.”
The broader policy package was:
Rate easing + CRR reduction + durable liquidity + transmission
16. Transmission to Banks
Monetary-policy transmission means the process through which a change in the RBI’s policy rate affects:
Money-market rates → Bank funding costs → Deposit rates → Lending rates → Borrowing → Demand → Output and inflation
The Annual Report notes that short-term money-market rates softened in line with the lower policy repo rate.
Transmission to banks’ deposit and lending rates remained steady during the year, aided by the external benchmark regime for loan pricing introduced in October 2019.
This is important for RBI examinations because a repo-rate cut has economic significance only if it ultimately influences financial conditions and borrowing costs.
17. What Happened to Liquidity?
System liquidity improved during the year and remained largely in surplus.
The RBI therefore had to manage liquidity in a manner consistent with effective monetary transmission.
The Annual Report records that liquidity management interacted closely with the movement of the weighted average call rate.
During April to early July 2025, large surplus liquidity kept the WACR close to the Standing Deposit Facility (SDF) rate, the floor of the corridor.
After liquidity absorption through VRRR operations from mid-July, the WACR moved closer to the repo rate. Later, when surplus liquidity moderated, the WACR moved closer to the Marginal Standing Facility (MSF) rate, the ceiling of the corridor.
This topic will be examined in greater depth in Part 11: Liquidity Management and Monetary-Policy Transmission.
18. India’s Policy Experience vs Global Central Banks
The Annual Report notes that central banks globally continued monetary-policy easing during 2025, but the pace and extent varied considerably.
The reason was different country-specific:
growth-inflation combinations.
While monetary policy globally became less restrictive, central banks remained cautious and data dependent. The RBI noted that unlike India, many central banks faced a less favourable growth-inflation trade-off, with weaker growth alongside persistent inflation.
The key conceptual takeaway
Monetary policy cannot be copied from another country.
A central bank’s decision depends on:
- domestic inflation;
- domestic growth;
- inflation expectations;
- liquidity;
- financial conditions;
- exchange-rate developments;
- global risks;
- fiscal conditions;
- external shocks.
Therefore:
Same global environment ≠ same monetary-policy response.
19. Complete MPC Revision Chart
Memorise this table.
| Meeting | GDP projection | CPI projection | Repo action | Repo after decision | Stance |
|---|---|---|---|---|---|
| April 2025 | 6.5% | 4.0% | -25 bps | 5.75% | Accommodative |
| June 2025 | 6.5% | 3.7% | -50 bps | 5.50% | Neutral |
| August 2025 | 6.5% | 3.1% | No change | 5.50% | Neutral |
| October 2025 | 6.8% | 2.6% | No change | 5.50% | Neutral |
| December 2025 | 7.3% | 2.0% | -25 bps | 5.25% | Neutral |
| February 2026 | — | — | No change | 5.25% | Neutral |
The projections and decisions above are reported in the Annual Report’s monetary-policy review.
20. The Most Important Numbers from Part 10
For last-minute revision, remember these:
| Item | Number |
|---|---|
| FY 2025-26 repo-rate reduction | 100 bps |
| Repo rate at end-FY | 5.25% |
| Broader Feb-Dec 2025 easing | 125 bps |
| April 2025 cut | 25 bps |
| June 2025 cut | 50 bps |
| December 2025 cut | 25 bps |
| June vote | 5–1 |
| CRR reduction | 100 bps |
| CRR after reduction | 3.0% NDTL |
| FIT inflation target | 4% |
| Lower tolerance | 2% |
| Upper tolerance | 6% |
| FIT framework period | April 2026–March 2031 |
| April GDP projection | 6.5% |
| December GDP projection | 7.3% |
| December CPI projection | 2.0% |
| Q2 FY26 GDP noted in December | 8.2% |
| Q2 FY26 inflation noted in December | 1.7% |
Key Takeaways
- RBI Annual Report FY 2025-26 records a clear monetary-policy easing cycle.
- Repo rate was reduced by 100 bps during FY 2025-26.
- Repo rate ended the year at 5.25%.
- The easing cycle itself had started in February 2025.
- From February to December 2025, the cumulative reduction was 125 bps.
- April 2025: 25 bps cut, stance changed neutral → accommodative.
- June 2025: largest FY cut of 50 bps, repo fell to 5.50%, stance became neutral.
- June was the only FY 2025-26 rate decision that was not unanimous: 5–1.
- August and October saw pauses despite very low inflation.
- December 2025 brought another 25 bps cut, taking repo to 5.25%.
- February 2026 retained the 5.25% repo rate and neutral stance.
- Monetary policy was supported by CRR reduction and liquidity measures, not merely repo-rate cuts.
- CRR was reduced by 100 bps to 3% of NDTL.
- The FIT review examined headline vs core, 4% target, ±2% band and point vs range targeting.
- The Government retained the 4% headline CPI target with a 2–6% tolerance band for 2026-31.
Exam Revision: What You Must Know
For MCQs
Q. By how much did RBI reduce the repo rate during FY 2025-26?
Ans. 100 bps
Q. Repo rate at the end of FY 2025-26?
Ans. 5.25%
Q. Which month witnessed the largest repo-rate cut?
Ans. June 2025 — 50 bps
Q. What was the June 2025 voting pattern?
Ans. 5–1
Q. When did the stance change from neutral to accommodative?
Ans. April 2025
Q. When did it return to neutral?
Ans. June 2025
Q. What is India’s inflation target for April 2026-March 2031?
Ans. 4% headline CPI
Q. What is the tolerance band?
Ans. 2%–6%
Q. CRR after the 2025 reduction?
Ans. 3% of NDTL
For Descriptive/Interview Questions
Be prepared to explain:
“Why did RBI reduce the repo rate despite concerns about global uncertainty?”
Answer structure:
Inflation moderated sharply → inflation-growth balance improved → policy space emerged → repo-rate cuts supported financial conditions → CRR/liquidity measures strengthened transmission → RBI remained data dependent because external and inflation risks persisted.
Also prepare:
“Why did RBI not continue cutting rates at every MPC meeting despite falling inflation?”
Because monetary policy decisions depend on the overall growth-inflation balance, transmission, external risks, core inflation and incoming data, rather than headline inflation alone.
One-Line Mega Revision
FY26 monetary policy = 100-bps repo easing to 5.25% + April accommodative shift + June 50-bps front-loaded cut + June return to neutral + CRR to 3% + December 25-bps cut + data-dependent pause + FIT retained at 4% ±2% for 2026-31.
Final Exam Warning
Do not make these four mistakes:
- 100 bps = FY 2025-26 reduction; 125 bps = February–December 2025 cumulative cycle.
- 5.25% = repo rate at the end of FY 2025-26.
- 4% = inflation target; 2–6% = tolerance band.
- Headline CPI remains the formal target; core inflation is not the replacement formal target.
Next Part
Part 11 — RBI Annual Report FY 2025-26: Liquidity Management and Monetary-Policy Transmission
The next article will go deeper into the operating framework, WACR, SDF, MSF, LAF, VRRR/VRRR auctions, durable liquidity, OMO purchases, system liquidity, corridor mechanics and transmission to deposit and lending rates—including the numbers most likely to matter in the RBI Grade B Promotion Exam.