Markets eye RBI's October policy decision as US Fed is set to kick off easing cycle this week

For last three quarters, retail inflation in India has stayed below the RBI’s tolerance band

As global investors await the US Federal Reserve’s policy move this week, the focus is gradually shifting to India, where the Reserve Bank of India (RBI) meets on October 1. With the Fed widely expected to launch its easing cycle with a 25-basis-point rate cut, analysts said the RBI may be inclined to mirror that trajectory, especially as inflationary pressures remain subdued and growth momentum steadies.

For the last three quarters, retail inflation in India has stayed below the RBI’s tolerance threshold of 6 percent, giving policymakers more breathing room to consider monetary easing. Market participants are broadly penciling in a 25-basis-point cut from the RBI, with some even flagging the possibility of a deeper reduction if external headwinds intensify.

“A potential Fed rate cut opens up space for the Reserve Bank of India to consider further easing,” said Kruti Chheta, Fund Manager and Fixed Income Analyst at Mirae Asset Investment Managers (India). She noted that the government’s policy measures aimed at boosting consumption have added stability to the growth outlook. “There remains room for a 25–50 basis point cut within the current easing cycle,” she added.

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Echoing a similar view, Abhishek Khudania, Senior Executive Director – Wealth, Client Associates, said the comfort on inflation strengthens the case for the RBI to ease policy further. “With CPI inflation appearing comfortably within the RBI’s 4 percent target for now, if the Fed cuts rates, the RBI could take a cue and reduce the repo by another 25 basis points. This would also help preserve the India–US 10-year yield spread, which has considerably narrowed in recent times.” That spread, currently at 2.3 percent as of August-end, was last witnessed back in 2005.

Barclays too expects the Monetary Policy Committee (MPC) to deliver a 25-basis-point cut in October, taking the repo rate down to 5.25 percent. But the firm also warned of risks stemming from geopolitics and tariffs.

“Should the 50 percent tariffs on India remain in place beyond 2025, one cannot rule out further monetary easing to support growth in the face of tariff-led drags,” its analysts wrote.

The inflation story supports this argument. India’s retail inflation rose modestly to 2.07 percent year-on-year in August, up from 1.61 percent in July, in line with estimates. The uptick was largely driven by higher prices of vegetables, meats, fish, oils, fats, personal care, and eggs. Meanwhile, core inflation—stripped of volatile food and fuel items—remained steady at 4.1 percent, similar to July’s range of 4 to 4.12 percent.

Tax and GST-related measures are also expected to temper inflation in the coming quarters. Experts point out that the government’s cuts on food items and essential household goods should cool price pressures.

Barclays estimates that the GST rationalisation could shave off nearly 50 basis points from consumer inflation over the rest of FY25–26. If that plays out, the MPC could be dealing with inflation readings even lower than its projected trajectory in the second half of the fiscal year.

On the global front, traders have already baked in expectations of the Fed’s first rate cut since December 2024.

According to the CME FedWatch Tool, markets are pricing in a 95 percent probability of a 25-basis-point cut this week, with only a slim 5 percent chance of a sharper 50-basis-point reduction. The move comes as US inflation remains a concern, but labor market data has turned softer, raising the risk of a deeper economic slowdown.

Fed Chair Jerome Powell had previously signaled that the September 16–17 policy meeting could mark the start of an easing cycle, pointing to “rising labor market risks” while cautioning about persistent inflation threats. Morgan Stanley projects the Fed will deliver four consecutive 25-basis-point cuts from September through January 2026, followed by two more in April and July.

Markets, meanwhile, appear to have already digested the likelihood of a Fed cut. Equity indices have factored in a dovish monetary stance from Washington, even as concerns linger about imported inflation triggered by tariffs under the Trump administration. For India, the October 1 meeting could prove pivotal. With inflation under control, GST reforms cushioning prices, and growth holding up, the stage looks set for a rate cut.

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