Overnight borrowing could actually become more expensive than the headline 25 bps hike

Economy No. 47 7 October 2026 · 3 min read

The RBI raised its repo rate by 25 bps to 5.50% on October 7, its first rate hike since February 2023. The MPC also changed its stance to "calibrated tightening". This means rate cuts are off the table for now, so the next move can only be a hike or a pause. The RBI last used a calibrated tightening stance in February 2019.

The repo rate did not move alone. 4 rates moved together:

Repo rate, now 5.50%: what the RBI charges banks to borrow overnight against government bonds. This is the main policy rate.

SDF (Standing Deposit Facility), now 5.25%: what the RBI pays banks when they park excess cash with it overnight, without needing to provide collateral. It sits 25 bps below the repo rate and acts as the floor for overnight rates.

MSF (Marginal Standing Facility), now 5.75%: what banks pay to borrow from the RBI overnight in an emergency, against government bonds. It sits 25 bps above the repo rate and acts as the ceiling for overnight rates.

Bank Rate, also 5.75%: the rate used for certain penalties when banks fall short of their reserve requirements. It is linked to the MSF, so when the MSF moves, the Bank Rate moves with it.

The SDF and MSF form a corridor around the repo rate, while the Bank Rate simply moves with the MSF.

Banks also lend to each other overnight. This is called the call rate, and it normally moves between the SDF and MSF.

But banks have been sitting on a lot of excess cash, so the call rate has stayed below the repo rate. Surplus cash has averaged ₹5.9 lakh crore a day since August, while the call rate has averaged 14 bps below the repo rate. The RBI now wants to bring the call rate closer to the repo rate.

Hence, this matters because overnight borrowing could become more expensive than what the headline 25 bps hike suggests. The call rate was around 5.11% before today's hike, while the new repo rate is 5.50%.

Step line of India's policy repo rate from October 2016 to October 2026, with the RBI's reason at each turn: cut to 6.25% in 2016 as food inflation fell, up to 6.5% in 2018 after crude rose 12%, cuts to 5.15% in 2019, 4.0% during COVID, 250 bps of hikes to 6.50% by 2023, held for 2 years, 125 bps of cuts to 5.25% in 2025, and up to 5.50% on 7 October 2026.

Step lines of the RBI's overnight rates since April 2022: the SDF floor 25 bps below the repo rate and the MSF and Bank Rate ceiling 25 bps above it, moving together. Now 5.25%, 5.50% and 5.75%.

Timeline of 9 turns in India's repo rate from October 2016 to October 2026, each with the reason the RBI gave at the time.

Sources