The Reserve Bank of India (RBI) raised its policy repo rate by 25 basis points to 5.50% on 7 October 2026 and changed its stance to “calibrated tightening”. For non-resident Indians (NRIs), that bears on two things: the rates Indian banks offer on rupee deposits, and the price of Indian government bonds, which falls when yields rise. This article explains the decision; it does not recommend any Indian security or deposit.
The decision
The six-member Monetary Policy Committee voted unanimously for the rise, according to the RBI’s policy resolution. The standing deposit facility rate moved to 5.25% and the marginal standing facility rate and Bank Rate to 5.75%. The vote on stance was not unanimous: Dr Nagesh Kumar and Prof Ram Singh preferred to keep it at neutral.
The committee spelled out what the new stance means. Given current conditions, “rate cuts are off the table in the near term”, and the next move “can only be a rate hike or a pause”, depending on how growth and inflation evolve. The minutes are due on 21 October 2026, and the next meeting runs from 2 to 4 December 2026.
Why the RBI acted
CPI inflation rose to 4.8% in August 2026 from 4.5% in July, with core inflation at 4.2%. The committee said inflation and its outlook “are not benign as they were last year”, with headline CPI expected to average almost 5.8% over the next three quarters. It cited a deficient monsoon, El Niño conditions and high energy and commodity prices, against the background of the conflict in West Asia. Growth remains strong: real GDP grew 7.8% in the April to June quarter.
| RBI projection | CPI inflation | Real GDP growth |
|---|---|---|
| 2026 to 2027 (full year) | 5.2% | 7.1% |
| July to September 2026 | 4.9% | 7.2% |
| October to December 2026 | 6.0% | 6.9% |
| January to March 2027 | 5.7% | 6.8% |
| April to June 2027 | 5.6% | 7.1% |
Source: RBI, Resolution of the Monetary Policy Committee, 7 October 2026. The RBI also projects core inflation of 4.4% for 2026 to 2027.
What usually follows for deposit rates
The RBI does not set deposit rates; each bank does. A higher repo rate raises the cost of the RBI’s funding to banks, and banks competing for deposits may respond by paying more on new fixed deposits. The link is loose, the timing varies, and other forces can swamp it. The RBI’s own figures show this. In July and August of this year, the weighted average rate on fresh term deposits fell by 28 basis points while the rate on fresh loans rose by 8 basis points, moving in opposite directions, according to the Governor’s statement. The RBI put the fall in deposit rates down to cheaper bulk deposits, as banks drew in liquidity from FCNR(B) deposits.
That FCNR(B) inflow followed a temporary RBI relaxation. An RBI notification dated 17 June 2026 (RBI/2026 to 2027/138) withdrew the interest rate ceiling on fresh FCNR(B) deposits of three to five years and relaxed interest rate restrictions on fresh NRE deposits of three years and above, for the period from 17 June to 30 September 2026, according to a secondary summary by the tax publisher Taxmann. The Governor said capital flow measures taken in June “have supported inflows”. Rates on existing fixed deposits do not change when the repo rate moves; only new and renewed deposits are priced afresh.
NRE, NRO and FCNR(B): the basics
| NRE | NRO | FCNR(B) | |
|---|---|---|---|
| Currency | Indian rupees | Indian rupees | A freely convertible foreign currency |
| Account types | Savings, current, recurring, fixed | Savings, current, recurring, fixed | Term deposit only |
| Fixed deposit term | One to three years (banks may accept longer) | As for resident accounts | One to five years |
| Repatriation | Repatriable | Current income; other balances up to US$1m a financial year | Repatriable |
| Indian income tax on interest | Exempt | Taxable | Exempt |
Source: RBI, Accounts in India by Non-residents, FAQ (as on 16 January 2025). The currency difference matters for UK-based savers: NRE and NRO balances move with the rupee against sterling, while an FCNR(B) deposit held in, say, pounds avoids that exchange-rate risk on the deposit itself.
Indian tax exemption is not the end of the story for UK residents. GOV.UK says that if you are UK resident you will normally pay UK tax on foreign savings interest, and you may be able to claim relief if the same income is taxed in two countries; see tax on foreign income.
What it means for Indian bonds
Bond prices move inversely to yields, so a rate rise tends to weigh on the value of bonds already issued, especially longer-dated ones. The Governor noted that government securities yields “hardened from mid-August to September”. At the RBI’s Treasury bill auction held on 7 October 2026, cut-off yields were 5.5747% for 91 days, 6.0999% for 182 days and 6.2869% for 364 days, according to the RBI. These are auction results, not a forecast. For how bond prices and yields interact, see bonds explained; for the UK side, read our reports on the Bank of England’s hold at 3.75% and gilt yields.
