RBI’s Monetary Policy Committee faces a close call
September 28, 2025
RBI faces tough choice on repo rate cut or status quo in October due to low inflation and growth.
Come October 1, it will be decision time for the Reserve Bank of India’s rate-setting panel, with continuation of the status quo and a repo rate cut being equally likely outcomes in the backdrop of retail inflation being well below the target and growth gathering momentum.
It will be a tough choice for the six-member monetary policy committee (MPC) when they meet between September 29th to October 1st for the current financial year’s 4th bi-monthly monetary policy review.
The US’ 50 per cent tariffs on Indian exports, the raising of the application fee for H-1B visa to $100,000, and the proposed move to impose 100 per cent tariffs on branded and patented pharma exports could have growth implications for the country. This could warrant a repo rate cut to support growth.
However, with GDP growth picking up to a five-quarter high in the first quarter (Q1FY26) of 7.8 per cent year-on-year (yoy) from 7.4 per cent in the preceding quarter, GST rate rationalisation expected to boost demand and the Rupee coming under pressure, there may be a case for maintaining a status quo on the repo rate.
The MPC has cumulatively cut the repo rate (the interest rate at which it provides liquidity to the banking system to overcome short-term liquidity mismatches) by 100 basis points (bps) since February 2025 to 5.50 per cent. The committee kept this rate on hold and continued with the “neutral” monetary policy stance at its last meeting in August.
Rating agency ICRA expects the MPC to maintain the status quo on the repo rate. Its view is supported by the positive impact of GST reforms on demand, stronger-than-expected Q1FY2026 GDP growth, and an inflation trajectory that (while lowered due to GST rationalization, with FY2026 average now 2.6 per cent), is expected to slope upwards thereafter.
Aditi Nayar, Chief Economist, ICRA, observed that the GST rationalisation could dampen the headline CPI prints by 25-50 basis points during Q3 FY2026-Q2 FY2027 period relative to the agency’s pre-GST rationalisation estimates, taking the average for FY2026 to 2.6 per cent (vs. 3.0 per cent earlier).
While October-November 2025 may mark a fresh low for the CPI inflation, the trajectory subsequently remains upward sloping, she added.
Headline CPI inflation inched up in August to 2.1 per cent (1.6% in July) after falling for nine consecutive months.
Nayar opined that GST rationalisation is unambiguously set to moderate inflation, However, this is the outcome of a policy change and will likely be accompanied by stronger demand. This suggests a status quo for the repo rate in the October 2025 policy review, in what appears to be a close call.
Radhika Rao, Senior Economist, DBS, noted that against the backdrop of firm growth of over 6.5%, fiscal levers being tapped to boost demand, inflation heading up gradually and the Rupee under pressure, the repo rate is expected to be left unchanged.
She said there is scope for 20- 30 bps increase in the official FY26 growth forecast (of 6.5 per cent) and a downward revision of a similar magnitude to inflation (projection of 3.1 per cent).
However, cognizant of fresh tariff salvos from the US and risks to growth, ICRA has assigned a 30 per cent probability for a cut, if the RBI sees reason in front-loading action. Though the agency is of the view that dovish talk will achieve the desired outcome.
SBI’s economic research department, in a report, said a 25 bps rate cut in the upcoming bi-monthly monetary policy review is the best possible option for RBI. But this will require calibrated communication from the central bank as post June, the bar for rate cut is indeed higher.
“There is merit and rationale in going for a September rate cut...But there is no point in committing a Type 2 error again (No rate cut with Neutral Stance) by not cutting rates in September as inflation will continue to remain benign even in FY27 and without a GST cut, it is tracking below 2 per cent in September and October.
“CPI FY27 numbers are now tracking 4 per cent or less, with GST rationalization, October CPI could be closer to 1.1 per cent... Lowest since 2004,” ERD economists said in a report.
Published on September 28, 2025
It will be a tough choice for the six-member monetary policy committee (MPC) when they meet between September 29th to October 1st for the current financial year’s 4th bi-monthly monetary policy review.
The US’ 50 per cent tariffs on Indian exports, the raising of the application fee for H-1B visa to $100,000, and the proposed move to impose 100 per cent tariffs on branded and patented pharma exports could have growth implications for the country. This could warrant a repo rate cut to support growth.
However, with GDP growth picking up to a five-quarter high in the first quarter (Q1FY26) of 7.8 per cent year-on-year (yoy) from 7.4 per cent in the preceding quarter, GST rate rationalisation expected to boost demand and the Rupee coming under pressure, there may be a case for maintaining a status quo on the repo rate.
The MPC has cumulatively cut the repo rate (the interest rate at which it provides liquidity to the banking system to overcome short-term liquidity mismatches) by 100 basis points (bps) since February 2025 to 5.50 per cent. The committee kept this rate on hold and continued with the “neutral” monetary policy stance at its last meeting in August.
Rating agency ICRA expects the MPC to maintain the status quo on the repo rate. Its view is supported by the positive impact of GST reforms on demand, stronger-than-expected Q1FY2026 GDP growth, and an inflation trajectory that (while lowered due to GST rationalization, with FY2026 average now 2.6 per cent), is expected to slope upwards thereafter.
Aditi Nayar, Chief Economist, ICRA, observed that the GST rationalisation could dampen the headline CPI prints by 25-50 basis points during Q3 FY2026-Q2 FY2027 period relative to the agency’s pre-GST rationalisation estimates, taking the average for FY2026 to 2.6 per cent (vs. 3.0 per cent earlier).
While October-November 2025 may mark a fresh low for the CPI inflation, the trajectory subsequently remains upward sloping, she added.
Headline CPI inflation inched up in August to 2.1 per cent (1.6% in July) after falling for nine consecutive months.
Nayar opined that GST rationalisation is unambiguously set to moderate inflation, However, this is the outcome of a policy change and will likely be accompanied by stronger demand. This suggests a status quo for the repo rate in the October 2025 policy review, in what appears to be a close call.
Radhika Rao, Senior Economist, DBS, noted that against the backdrop of firm growth of over 6.5%, fiscal levers being tapped to boost demand, inflation heading up gradually and the Rupee under pressure, the repo rate is expected to be left unchanged.
She said there is scope for 20- 30 bps increase in the official FY26 growth forecast (of 6.5 per cent) and a downward revision of a similar magnitude to inflation (projection of 3.1 per cent).
However, cognizant of fresh tariff salvos from the US and risks to growth, ICRA has assigned a 30 per cent probability for a cut, if the RBI sees reason in front-loading action. Though the agency is of the view that dovish talk will achieve the desired outcome.
SBI’s economic research department, in a report, said a 25 bps rate cut in the upcoming bi-monthly monetary policy review is the best possible option for RBI. But this will require calibrated communication from the central bank as post June, the bar for rate cut is indeed higher.
“There is merit and rationale in going for a September rate cut...But there is no point in committing a Type 2 error again (No rate cut with Neutral Stance) by not cutting rates in September as inflation will continue to remain benign even in FY27 and without a GST cut, it is tracking below 2 per cent in September and October.
“CPI FY27 numbers are now tracking 4 per cent or less, with GST rationalization, October CPI could be closer to 1.1 per cent... Lowest since 2004,” ERD economists said in a report.
Published on September 28, 2025