RBI MPC Highlights: Governor Malhotra holds repo rate at 5.5%; inflation forecast cut to 2.6%, GDP growth raised to 6.8%

FY26 GDP growth projections revised upward, says RBI Governor

The Reserve Bank of India’s Monetary Policy Committee (MPC) on Wednesday, 1 October, kept the repo rate unchanged at 5.5 percent with a neutral stance, marking its second consecutive pause after three cuts totalling 100 basis points earlier this year. The unanimous decision was announced by Governor Sanjay Malhotra as the central bank unveiled its fourth bi-monthly policy of FY26.

Alongside the rate decision, the RBI lowered its inflation forecast to 2.6 percent for the year, citing the impact of GST reforms and easing food prices. The central bank revised its GDP growth projection upward to 6.8 percent despite warning that US tariffs and global headwinds could weigh on exports.

Highlights

• Policy decision | Repo rate unchanged: The MPC unanimously voted to keep the repo rate steady at 5.5 percent, with the SDF at 5.25 percent and the MSF and Bank Rate at 5.75 percent. The stance remains neutral. Two MPC members suggested shifting the stance to accommodative, but the majority favoured maintaining neutral.
• Inflation outlook | Forecast cut: The RBI cut its CPI inflation forecast for FY26 sharply to 2.6 percent from 3.1 percent earlier, reflecting the impact of GST rate cuts, benign food prices, and adequate foodgrain stocks. Quarterly projections: Q2 at 1.8%, Q3 at 1.8%, Q4 at 4.0%, and Q1 FY27 at 4.5%. The MPC noted that headline inflation has turned more benign, with food inflation easing to its lowest since 2019.
• Growth projections raised: The RBI raised its GDP growth forecast for FY26 \to 6.8 percent from 6.5 percent earlier. Its Q2 forecast is now at 7.0% (vs. 6.7% earlier), Q3 at 6.4% (vs. 6.6%), and Q4 at 6.2% (vs. 6.3%). Growth for Q1 FY27 is now seen at 6.4%.
• Domestic drivers remain strong, aided by robust consumption, investment, and GST reforms, though external demand is likely to weaken due to tariffs and global headwinds, said Governor Malhotra.
• Governor Malhotra says GST cuts helping, but Trump Tariffs may hurt: Malhotra said GST reforms are helping moderate inflation pressures, but warned that higher US tariffs of up to 50 percent on Indian exports are likely to slow external demand. He noted that domestic momentum has so far remained resilient, supported by government policy measures, but global headwinds and tariff-related uncertainty warrant caution.
• Rupee & external sector: Malhotra said the RBI is closely monitoring rupee movements amid volatility and phases of depreciation. Net FDI inflows hit a 38-month high in July, even as FPIs recorded outflows of USD 3.9 billion so far in FY26. Forex reserves stand at USD 700.2 billion, covering more than 11 months of imports.
• Liquidity and transmission: Banking system liquidity averaged a daily surplus of Rs 2.1 lakh crore since the August policy. The drawdown of government balances and the remaining 75 bps CRR cut will ease liquidity further in October-November. Transmission has been broad-based: fresh loan rates of scheduled banks have fallen by 58 bps since February, while fresh deposit rates are down by 106 bps.
• Inflation mandate: Malhotra reiterated that the RBI’s primary mandate is to keep CPI-based retail inflation at 4 percent, with a tolerance band of ±2 percent. He recalled that the MPC had front-loaded cuts of 25 bps each in February and April and 50 bps in June amid easing inflation. Retail inflation has remained below 4 percent since February, falling to a six-year low of 2.07 percent in August on the back of softer food prices and a favourable base.
• Food prices & outlook: The Governor said the decline in headline inflation is largely due to easing food inflation. He noted that net FDI inflows reached a 38-month high in July, driven by cross-border investments, and added that the inflation outcome is now expected to be softer than projected in the August policy, primarily because of GST rate cuts.
• Financial stability: Scheduled banks’ capital adequacy ratio stood at 17.5% in June 2025, with GNPA ratio improving to 2.22%. NBFCs too remain sound, with CRAR at 25.7% and GNPA ratio at 2.23%. Malhotra said system-level indicators reflect continued strength across banks and NBFCs.
• Additional measures: The RBI announced 22 regulatory steps. Key ones include: implementing the Expected Credit Loss framework and revised Basel III norms from April 2027 with glide path till 2031; enabling banks to finance corporate acquisitions and expand lending against shares/IPO financing; easing infrastructure financing norms for NBFCs; considering new licences for urban co-operative banks; rationalising FEMA and ECB rules; and enhancing the consumer protection framework through an expanded Ombudsman scheme and digital banking access for basic accounts. The RBI also outlined steps to advance internationalisation of the rupee.