The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) is set to announce its policy decision on October 1, 2025. The repo rate currently stands at 5.50 percent, with the policy stance described as “neutral.” However, the August 2025 policy communication was read as quite hawkish by market participants. Since then, market dynamics have shifted due to GST rate rationalisation (which is likely to ease inflation in India) and increase in tariffs on Indian goods exports to the US, steep hike in new H1B visa fees. As a result, market expectations for the upcoming policy remain mixed.
In August 2025, the RBI projected real GDP growth at 6.50 percent for FY26. Q1FY26 the real GDP growth was reported at 7.8 percent, which exceeded the expectations of market in general. However, nominal GDP growth in Q1FY26 was at 8.8 percent, due to low deflator. Given recent developments, we anticipate an upward revision to 6.7-6.8 percent.
India’s manufacturing PMI stood at 59.3 in August, though preliminary data for September indicates some moderation. The 25 percent tariff hike announced by US President Donald Trump, which came into force on August 27, is expected to dampen growth, although the GST rate cuts may stimulate private consumption in H2FY26, supporting overall growth. Greater clarity on growth prospects will emerge once the India-US trade negotiations conclude.
Headline inflation for August 2025 was 2.07 percent, up from a revised 1.61 percent in July. Despite the marginally uptick, inflation remains well within the RBI’s medium-term target of 4 percent. The recent GST rationalisation is expected to reduce inflation by 50–90 basis points over the next year. India experienced above-normal rainfall in August, and the IMD’s September forecast projects seasonal rainfall at 107 percent of the long-period average. While this bodes well for agricultural output, excessive rainfall could disrupt the harvest of standing crops.
Consequently, we expect the RBI to revise its FY26 inflation forecast downward from 3.10 percent to around 2.50 percent ~2.80 percent. However, inflation projection for Q1FY27 (in August 2025 it was projected at 4.9 percent) will be the key for forward guidance on the policy, irrespective of the action or stance.
On the liquidity front, the banking system slipped into deficit on September 22 for the first time in FY26, driven by GST and advance tax outflows. The deficit stood at Rs 0.26 lakh crore as of September 24. In response, the RBI conducted several Variable Rate Repo (VRR) auctions to inject liquidity. However, system liquidity was in surplus at Rs 5.10 lakh crore on the same date. The RBI continued to use VRRR/VRR to fine tune the liquidity.
The Central Government’s borrowing calendar for H2FY26 was announced recently. The calendar suggested a marginal reduction in gross bond supply and a 5.5 percent cut in long-term bond issuance. This move may help contain rising long-term yields.
While the RBI has cut the repo rate by 100 bps since February 2025, supplied ample liquidity, but its policy stance being read as very hawkish by market participants. This has led to tighter financial conditions compared to end-May. Evaluating inflation and growth risks, both appear to be skewed to the downside. Achieving 7 percent+ growth seems increasingly challenging, and while inflation is benign for the current fiscal year, it may edge up slightly next year—though still likely to remain in a manageable range.
Globally, the US Federal Reserve has resumed rate cuts with 25 bps cut in September 2025 FOMC meeting, and the Indian rupee has depreciated against peer currencies—effectively tightening domestic financial conditions. In this context, the need to ease financial conditions is becoming more urgent. If the RBI opts to hold repo rate at 5.50 percent this time with a softer communication tone, it could strike the right balance and achieve its policy objectives and will be a very welcome move.
Ultimately, whether it’s prudent to wait for the tariff situation to resolve before acting on policy remains an open question.
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