RBI MPC October policy signals dovish tone, opens up space for future rate cut

RBI MPC October policy signals dovish tone

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) met from September 29 to October 01, 2025 amidst benign headline inflation readings in India along with global uncertainties. The MPC unanimously voted to keep the policy repo rate unchanged at 5.50 percent which was in line with the majority of market expectation. The MPC also kept the stance unchanged at neutral while two of the external MPC members viz Dr. Nagesh Kumar and Prof. Ram Singh voted to change the stance to accommodative.

The Governor has quietly slipped the ball in the gully for a four with outright dovish commentary:

•> Governor mentioned that Indian GDP Growth remained below aspiration. While the real GDP growth forecast for FY26 was revised upwards to 6.8 percent this was largely led by robust growth in H1FY26. GDP growth for H2FY26 and Q1FY27 has been revised downwards by 10~20 bps. Governor statement noted that: “the current macroeconomic conditions and the outlook has opened up policy space for further supporting growth”

•> Inflation forecast for FY26 was revised downwards to 2.60 percent from 3.10 percent as stated in August 2025 policy. The same for Q1FY27 is revised downwards to 4.5 percent from 4.9 percent projected in August 2025

•> Two of the external MPC members have voted for change in stance to accommodative

Related stories

Deepak Agrawal

Chief Investment Officer (Debt Fund)|Kotak Mahindra Asset Management Company

• 
  RBI MPC’s unanimous pause on rates reflects caution amid softening inflation and geopolitical unce...
• 
  With meaningful RBI action, interest rates likely to remain softer; bond yield curve may flatten ove...
• 
  RBI MPC provides helping hand to boost GDP growth, next repo rate cut likely in June

•> In the post policy press conference, RBI Governor mentioned that the transmission in bond market has been limited so far and there is scope for the 10-years yields to fall

•> Consequently 10 years G-sec yields have softened by ~6 bps after the policy and press conference towards the closing of the day

•> The new 10-year G-Sec is likely to trade in the range of 6.40 percent-6.60 percent.

With the evolving growth and inflation dynamics, we believe that there is scope of rate cut(s) in the near future. RBI may have decided to pause in this policy on account of (i) waiting for development in negotiations on US tariffs on Indian goods, (ii) actual impact of recent GST rationalisation of growth and inflation, (iii) more transmission for earlier rate cut to happen in the economy.

On the liquidity front, the banking system liquidity remained in surplus at Rs 0.78 lakh crore as on September 30, 2025 while the system liquidity stands at an average daily surplus at Rs 2.10 lakh crore since last MPC in August. The cash reserve ratio (CRR) currently stands at 3.75 percent and the 75 bps cut in CRR in October & November 2025 is likely to support the banking system liquidity in the near term. The MPC reiterated that it will actively manage liquidity to anchor short term rates.

The weighted average lending rate (WALR) of Scheduled Commercial Banks had fallen by 58 bps for fresh loans and the weighted average domestic term deposit rate (WADTDR) on new deposits has fallen by 106 bps since the 100-bps rate cut in policy rate. This indicates that monetary policy transmission is underway and the adequate liquidity and CRR cut will foster further transmission of rate cuts.

The Federal Open Market Committee (FOMC) of US in its September policy had decided to reduce the benchmark rate at 4.00-4.25 percent. Additionally, the Fed indicated further rate cuts going forward in CY2025. However, recent GDP data with upward surprise at 3.80 percent for Q2CY2025 (third estimate) and the weakening of dollar increases the uncertainty over the rate cuts going forward.

Given the backdrop, the commentary by the RBI Governor was dovish as compared to neutral to hawkish in August policy. Moreover, the headline inflation has remained softer over the last several months while there has been negative impact on India’s exports due to tariffs. As a result, we expect 25 bps repo rate cut in the next December 2025 policy and further trajectory will depend on data as it unfolds later.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.