Ahead of the Reserve Bank of India's October policy meeting, roughly two-third of the market participants are expecting the monetary policy committee (MPC) to hold fire this week, while others are expecting RBI to factor in upcoming risks to growth and cut on October 1.
We at DBS Bank expect the RBI to keep the benchmark rate unchanged at 5.5% this month, with a 30% probability of a cut if the central bank sees reasons to frontload policy action.
Why Jump the Gun?
The MPC will mull over a host of developments at the October review meeting. Growth exceeded consensus by nearly 1 percentage point to rise 7.8% YoY in 1QFY26 on domestic cues, and we expect 1HFY26 average to stay above 7%, partly influenced by low deflators. Fiscal policy has picked the baton to support growth via income tax relief, followed by GST rate rationalisation, and RBI’s steps to spur loan growth. Inflation is off low but at benign levels with indirect tax cuts set to impart further disinflationary impulse.
By contrast, the external environment has turned unfavourable as the US tariff on goods was raised to 50%, besides recent moves to broaden punitive action on service/ invisibles trade, if the H-1B restrictions followed by the passage of a tariff/levy on outsourcing to foreign countries (through the HIRE Act). The channels of impact are likely to be three-fold. Firstly, incremental flow of H-1B workers will moderate inward remittances, though adjusted for inflows from the US (a third of total) and, within that the future H-1B cohort (~annually 60,000), the impact is expected to be marginal.
Secondly, impending visa restrictions are likely to encourage more offshoring back to India/ near-shoring to other countries, a development that had already been set into motion during previous travel restrictions and a gradual tightening in H-1B availability. In effect, expectations are that a decline in revenue from on-site services can be offset by higher GCC operations, with the HIRE Act moot in this respect. Lastly, a material fall in the appetite for overseas education could lead to current account savings, to the extent that the demand doesn’t shift to other destinations. Overall, we see negligible impact on the CAD in the short-term, with medium-term implications if more mobility restrictions are put in place. These risks have manifested into a weaker rupee. The FOMC has embarked on its second leg of easing after a long pause.
Against this backdrop of firm domestic growth of over 6.5%, fiscal levers being tapped to boost demand, inflation heading up gradually and INR under pressure, we expect the repo rate to be left unchanged in October. There is scope for 20-30 bps increase in the FY26 growth forecast and a downward revision of a similar magnitude to inflation. Cognizant of fresh tariff salvos from the US and risks to growth, we assign a 30% probability for a cut, if the RBI sees reason in frontloading rate action. Liquidity will be maintained in surplus territory, also helped by the phased CRR cuts from September (to November 2025). Agile market operations will mean undertaking VRRR auctions to keep short-term rates close to the repo rate. The biannual Monetary Policy report will also be released with updated official projections.
Our view is that RBI's dovish talk will achieve the desired outcome. Forward looking policy guidance will be important, after bond yields rose sharply following the August meeting, where the neutral stance and lack of clarity on further rate cuts hurt sentiment. To better balance demand-supply dynamics, the 2HFY26 borrowing calendar addressed markets’ demand for a rejig in the tenor breakdown. The share of more than 10Y maturity has been brought below 45% vs nearly 52% last year. This reflects the actual shift in demand supply dynamics – as the demand from insurance companies, including FRA demand has slowed down and accordingly 40-year tenor has been adjusted downwards.
These changes together with a dovish guidance and openness to conduct market operations to ‘walk the talk’ will help to contain a further rise in bond yields. On rates, we expect the MPC to highlight that they have room and willingness to act, if required, effectively waiting till December to gauge impact of tariffs before easing further.
Looking ahead, the MPC is likely to be guided by growth rather than inflation. We have not factored in further cuts in our baseline trajectory but expect the central bank to signal readiness to act to anchor bond markets. We expect the 10Y yields to head towards 6.3% by end of the fiscal. Our end-2025 INR FX projection is for the USD/INR to return below 88.00, premised on further US dollar correction, central bank’s intervention, and signs of material progress on trade negotiations with the US. Notably, the rupee remains at competitive levels on real terms, with the INR REER hovering at 98-100 in recent months.
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