The short
- Continuity bias: Retaining 4% with ±2% keeps policy credibility and inflation expectations anchored. Markets read this as lower term premia than a higher target.
- Tighter vs wider bands: Narrower bands mean faster reactions to persistent food shocks; wider bands allow transitory spikes to pass but risk un-anchoring expectations.
- EMIs—plain math: For a ₹30L, 20-yr home loan, every 25 bps ≈ ₹480–₹520/month; 100 bps ≈ ₹1,900–₹2,000/month around current lending rates (illustrative).
How the framework works
India targets headline CPI with a point target (4%) and a tolerance band (±2%). The MPC sets the repo rate to steer inflation toward the target while supporting growth. Credible targets reduce inflation risk premia embedded in bond yields and loan/deposit pricing.
Heads-up RBI has released a discussion paper and invited public comments before the legally mandated 2026 review. Final decisions rest with the government in consultation with RBI.
Scenario table — what different choices may imply
| Target / Band | Policy bias (qualitative) | 10Y G-Sec risk premia* | Loan/Deposit direction | Comment |
|---|---|---|---|---|
| 4% ±2% (status quo) | Neutral | Anchored | Stable-to-lower vs uncertainty | Continuity + credibility |
| 4% ±1% (narrower) | Hawkish on shocks | Slightly lower | Lower vs wide band | Faster response to persistent food spikes |
| 4% ±3% (wider) | Dovish on transients | Slightly higher | Higher vs narrow band | Looks through short spikes; expectation risk |
| 5% ±2% (higher point) | Dovish overall | Higher | Higher EMIs/deposits | Re-sets expectations; may raise term premia |
*Directionally illustrative, not a forecast.
EMI math — quick rules
- ₹30 lakh, 20 years: around current rates, +25 bps ≈ +₹480–₹520/month; +100 bps ≈ +₹1,900–₹2,000/month.
- Sensitivity scales with size/tenor: Bigger loans and longer tenors increase rate sensitivity.
Formula (for reference): EMI = P·r·(1+r)n / [(1+r)n − 1], where r = monthly rate, n = months.
Systems to keep in mind
Curve & liquidity
Targets anchor expectations; OMOs, VRRR/VRR, and G-sec supply shape the curve around that anchor.
Food & fuel
Headline CPI includes volatile items—band width determines how much policy looks through transitory spikes.
Credit transmission
Repo changes pass through via EBLR/MCLR with lags; deposits re-price faster when liquidity is tight.
Credibility premium
Stable targets reduce uncertainty premia in bonds and corporate borrowing costs.
What to watch next
- Public comment window and the final recommendations.
- Government notification on the next framework period.
- Market reaction: breakeven inflation, term premia, and curve shape.