ANALYSIS Would it benefit the economy if RBI surprises market with a rate cut in October policy?

Reserve Bank of India

Even though the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is expected to hold key interest rates or repo rate in the October policy, but there are few set of experts who believe 25 basis points (Bps) rate cut is likely.

The rate cut expectation has emerged given the current inflation trajectory and further support to the growth despite the recent push to boost consumption by cutting Goods and Services Tax (GST).

Further, Barclays said in a note that after a neutral pause in August, we see the RBI MPC cutting policy repo rate by 25bp in the upcoming October 1 meeting, acknowledging that this is a close call versus a dovish pause, and deferring the cut to December.

“The undershooting of CPI inflation versus estimate, the tariff overhang on the growth outlook and recent tightening of financial conditions (likely impeding transmission) are the pillars of our October rate cut call,” Barclays said.

The MPC meeting which has started on September 29, will deliver its decision on the rate action on October 1.

Since February, the MPC has reduced the repo rate by 100 bps to aid growth, with a 25 bps cut in February and April and 50 bps in June.

Here are some benefits the rate cut in October monetary policy will provide if it happens:

Further push to growth

Even as the growth which was lagging has seen a revival in the first quarter of the current financial year and GST rate cut will aid some support to it, but the rate cut by the RBI will further increase the consumer demand and cheaper borrowing for the corporates and individuals.

The more money in hands of consumers and improved demand will help them to spend more leading to increase in consumption and aiding growth more.

GST reforms will act as a cushion against tariff-related uncertainties and should the US ease its levies, the tailwind, along with the Centre's fiscal support and easier monetary conditions, could lift confidence across the manufacturing supply chain.

India's economy grew 7.8 percent in the June quarter, its fastest pace in five quarters, beating estimates.

Barclays acknowledges that there is no pressing need to revise down FY25-26 real GDP growth forecasts (Barclays: 6.5%), amid these slowing high-frequency indicators, given the upside surprise on Q1 GDP print, the tariff-related concerns are expected to weigh on growth projections for FY26-27, should 50% tariffs by US on India last beyond 2025.

Enhance credit growth

A rate cut by the RBI lowers the repo rate, which reduces banks’ cost of funds and allows them to pass on lower lending rates to borrowers, which makes loans cheaper for households and businesses, spurring demand for credit across retail segments like housing, auto, and personal loans as well as corporate borrowing for investment and working capital, thereby directly boosting overall bank credit growth.

Systemic credit growth stood at 10.03 percent year-on-year in the fortnight ended August 22, signalling that banks are ramping up credit ahead of the festival season amid rate cuts and expected consumption boost following GST regime overhaul.

This the third consecutive fortnight that credit growth remained in double digits.

Rally in bond market

Whenever, the RBI cuts the key interest rates, it typically triggers a bond market rally, experts said. This is because lower policy rates reduce future borrowing costs and signal an accommodative stance, leading to expectations of falling yields.

This also helps investors to gain more on their investment as yields and prices move inversely.

Inflation dynamics

Since the 6 August policy, incoming inflation prints and trackers indicate that inflation in FY25-26 is set to surprise the RBI on the lower side yet again. Between April–August CPI inflation averaged at 2.35 percent, lower than expected. The cumulative CPI buildup during these months, at 2.6 percent, is lower than the 4% buildup typical of these months. Moreover, the GST rate rationalisation tailwind creates space for CPI inflation to stay durably low, Barclays said.

A SBI Research note said that a 25 bps rate cut is the “best possible option for the RBI.” The view is based on the belief that the bottom of CPI inflation may not have been reached yet, and could further decline by 65-75 bps due to significant GST rationalisation.

Nomura too has noted a shift in market sentiment, with many participants now expecting the RBI to cut rates further in the coming months. “Our economists continue to forecast two more reductions, one each in October and December,” said Nomura.