RBI raised the repo rate to 5.50% and shifted its stance to calibrated tightening. Know the meaning of key terms including second-round effects, underlying inflation and policy corridor.

After cutting the repo rate by 125 basis points in 2025 and keeping it unchanged at 5.25% for four consecutive policy reviews, the Reserve Bank of India (RBI) has changed course.

On Wednesday (October 6), the RBI raised the repo rate by 25 basis points to 5.50%, the first hike in 44 months. The central bank also shifted its policy stance to “calibrated tightening” from “neutral”.

While the rate hike was largely expected, the change in stance is the bigger signal. It indicates a greater focus on containing inflation, with future policy decisions likely to depend on how price pressures evolve. What does RBI’s calibrated tightening mean?

The RBI’s new stance indicates that monetary policy has moved towards containing inflation rather than supporting growth through easier financial conditions.

Governor Sanjay Malhotra said the duration and extent of any rate-hike cycle would depend on developments in growth and inflation, particularly underlying inflation, the broadening of price pressures and second-round effects from supply shocks.

From “calibrated tightening” to “second-round effects” and “underlying inflation”, here are five key terms from the RBI’s latest monetary policy that you need to understand.

1. Calibrated tightening: What does it mean? “Calibrated tightening” means the RBI is prepared to withdraw monetary accommodation if inflation warrants it, but the pace and extent of any further action will depend on economic conditions.

The stance therefore does not imply a rate increase at every policy meeting. Instead, the RBI has retained flexibility to respond to incoming inflation and growth data.

Deutsche Bank Chief Economist Kaushik Das said the change in stance makes a cumulative 100-basis-point rate hike more realistic, although liquidity management could require separate measures from the RBI.

“As I mentioned to you in the pre-policy discussion that we are expecting 100 basis points rate hike, I think that looks more realistic now compared to the median estimate, which was lower,” Das said.

He also highlighted the RBI’s reference to an “appropriate mix” of liquidity-management tools. Das said short-term rates may need to remain close to, or potentially above, the repo rate, which could require tools such as open market operations (OMOs) and sell/buy swaps to absorb liquidity.

2. Second-round effects: Why does RBI care about them? The first impact of a supply shock such as higher crude oil prices may be limited to specific goods and services. The concern arises when that initial increase spreads through the wider economy.

Higher fuel prices, for instance, can raise transportation and production costs. Businesses may pass these costs on to consumers, while higher living expenses can influence wage demands. This can make an initially temporary shock more persistent. These broader knock-on effects are referred to as second-round effects. The RBI is particularly watchful of their impact on inflation expectations and businesses’ pricing behaviour.

Ashwini Kumar Tewari, Managing Director, SBI, said the central bank is monitoring these effects, particularly the risk of inflation expectations rising and making price pressures more persistent.

3. Underlying inflation: What is it? Underlying inflation refers to the more persistent component of price growth after temporary or volatile movements are taken into account.

For policymakers, it provides a better indication of whether inflation is becoming entrenched rather than being driven by isolated price shocks.

Core inflation is one commonly used measure of underlying price pressures. It excludes food and beverages as well as fuel from the Consumer Price Index (CPI).

Core inflation rose to 4.2% in August 2026 after remaining at 3.9% for three consecutive months. The RBI has projected core inflation at 4.4% for 2026-27.

4. Inflation generalisation: Is rising inflation spreading? The RBI is also tracking whether price pressures are becoming broader across the consumer basket.

If inflation is limited to a small number of items, the impact can be narrower. But when a larger share of goods and services records elevated price increases, inflation becomes more broad-based. The RBI uses indicators such as diffusion indices to assess this trend.

According to the central bank, the weighted share of items recording inflation above 4% rose to about 37% in August 2026.

Malhotra said early signs of inflation becoming more generalised were visible through higher core inflation and price increases across a larger segment of the CPI basket.

5. Policy corridor: What are the other RBI rates? The repo rate is part of a broader framework that guides short-term interest rates.

After Wednesday’s hike, the repo rate stands at 5.50%. The Standing Deposit Facility (SDF) rate is 5.25%, while the Marginal Standing Facility (MSF) rate and Bank Rate are at 5.75%.

The SDF allows banks to park surplus funds with the RBI without collateral. The MSF provides banks with an overnight borrowing facility, typically at a rate above the repo rate.

The RBI uses these instruments, along with liquidity-management operations, to keep short-term money-market rates aligned with its monetary-policy stance.