The RBI is also likely to raise the FY26 growth forecast by 20-30 basis points while revising inflation downwards of a similar magnitude. However, a small section of economists believes that an unfavourable external environment due to an overhang of US tariffs on goods trade and the risks to growth, the recent H1B visa restrictions, and the FOMC embarking on its second leg of rate cuts raise the probability of a surprise rate cut by the MPC.
The six-member MPC led by Governor Sanjay Malhotra, will begin its deliberations on Monday with the decision to be announced on Wednesday.
Says Radhika Rao, executive director and senior economist at DBS Bank, “Against the backdrop of firm growth of over 6.5 per cent, fiscal levers being tapped to boost demand, inflation heading up gradually and INR under pressure, we expect the repo rate to be left unchanged this month. However, cognizant of fresh tariff salvos from the US and risks to growth, we assign a 30 per cent probability for a cut, if the RBI sees reason in frontloading action. Though we are of the view that
dovish talk will achieve the desired outcome.”
“We expect the MPC to highlight that they have room and willingness to act, if required, effectively wait till December to gauge impact of tariffs before easing further,” added Rao.
However, a few economists including SBI’s chief economist Soumya Kanti Ghosh see merit and rationale for the RBI to reduce the key benchmark lending rate by 25 basis points.
Economic growth exceeded consensus by nearly one percentage point to rise 7.8 per cent yoy in 1QFY26 supported by resilient private consumption, continued government capex, and a rebound in revenue spending. While high-frequency indicators are showing a mixed trend and trade tariff uncertainty clouds the outlook, the government’s decision to simplify the GST structure is set to release around Rs 500 billion into the economy, boosting domestic consumption and also
dampen headline CPI inflation by 25-50 bps during Q3 FY2026-Q2 FY2027.
Collectively, these measures help cushion the economy against softer export prospects and external headwinds. Growth is expected to stay above 7 per cent on an average for the first half of the fiscal partly influenced by low deflators. On the other hand, August inflation rose 2.07 per cent year on year, returning to the lower bound of the target range (+/-2 per cent around 4 per cent midpoint). This marks a rise for the first time in nearly ten months and compares to 1.6 per cent in July. For FY26 year to date inflation stands at average 2.35 per cent yoy versus 4.6 per cent in FY25.
However, the US has raising tariffs on Indian exports to US to 50 per cent, hiked H1 B visa fee hike and now plans to impose 100 per cent tariff on imports of branded or patented drugs. Despite a weaker USD, the INR hit a record low, down 5 per cent year on year with the RBI limiting intervention and unwinding forward positions to preserve reserves while letting depreciation aid exports.
The RBI has already reduced the repo rate by 100 basis points since February, amidst declining CPI inflation. After reducing the repo rate three times in a row, the RBI hit a pause button in August.
The transmission of the past 100 bps rate cut is assessed as nearly complete for fresh deposits (-94 bps) but muted for outstanding deposits (-18 bps). Similarly, the Weighted Average Lending Rate for fresh loans declined by 60 bps, compared to a 42-bps easing for outstanding loans. Further significant transmission to lending rates is considered limited in the coming months. A pending 75 bps CRR cut during October-November 2025 and G-sec redemptions (Rs one lakh crore) in early-November 2025 are expected to support liquidity, offsetting festive season currency leakage pressure.
The US Fed cut rates by 25 bps to 4.00-4.25 per cent in September 2025 after an extended pause. The 10Y US Treasury yield rose to 4.14 percent, widening the spread with the 10Y India G-sec to 236 bps from 209 bps at end-June 2025.