Will RBI go for a 25 bps cut? Five factors to track in the October MPC review

Reserve Bank of India

The interest rate decision by Reserve Bank of India's Monetary Policy Committee (MPC) is coming at a time when the domestic growth has rebounded and the Centre's has recently unleashed a major reform through the goods and services tax (GST) rate cut. Aside of that, the retail inflation has stayed way below than RBI’s medium-term target of 4 percent.

Bankers, economists and fund managers polled by Moneycontrol see a status quo on rates, with a majority of participants expecting the policy stance to be ‘neutral’. In this context, here are the five key things to watch out for in the RBI Policy on October 1.

Rate Trajectory

Most economists believe the RBI may hold interest rates steady at 5.50 percent, with the rate-setting panel likely to draw comfort from the higher GDP growth during Q1FY26, while taking its time to assess the impact of the Goods and Services Tax (GST) rate cut.

However, some economists are predicting a 25 bps rate cut given the current inflation trajectory and further support to growth despite recent push to boost consumption by cutting GST.

Barclays said in a note that after a neutral pause in August, it sees the RBI MPC cutting policy repo rate by 25 bps on October 1, acknowledging that it is a close call versus a scenario of a dovish pause followed by a December cut.

Will RBI Revise Inflation Projection?

Most economists and experts are of the view that the RBI will revise Consumer Price Index (CPI) inflation projection lower, taking comfort from the GST rate cut. “CPI Inflation will be projected 10 bps lower,” said Anshul Chandak, head of treasury at RBL Bank.

Gopal Tripathi, head of treasury at Jana Small Finance Bank said he expects the CPI projection to be 20-30 bps lower from previous estimate. India's retail inflation rose marginally to 2.07 percent in August, breaking a 10-month fall, although food inflation remained in negative territory for a third consecutive month.

Revision in Growth Projections?

Unlikely. Most experts do not expect the RBI to revise growth projections as tariff uncertainty and the H-1B visa fee hike may offset the demand boost generated by the GST reforms. "Tariffs and H-1 visa damage will compensate for the demand boost from GST," said Murthy Nagarajan, head-fixed income, Tata Asset Management.

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.

Liquidity Measures

RBI is unlikely to announce any additional liquidity measure during the October review, and instead will continue with the variable rate repo (VRR) and variable rate reverse repo (VRRR) auctions to manage short-term liquidity, treasury officials with banks have told Moneycontrol.

The central bank’s decision is expected to be guided by two key developments - the release of the second tranche of the cash reserve ratio (CRR) cut, which infuses durable liquidity, and a higher government spending toward the end of the month.

Banks' Expectations

There are some growing expectations that there could be some package for the micro, small, and medium enterprises (MSMEs) to counter the impact of the US Tariffs. On September 3, Moneycontrol had reported that the Union Cabinet is expected to approve a financial-support package for the MSMEs to help them counter the impact of higher US tariffs.