Despite moderating growth and lowered inflation forecast, why did RBI MPC hold off on rate cut in October?

RBI Policy Decision Analysis

While the recent US Fed Rate cut and benign domestic inflation had raised hopes in certain sections of the Indian markets that RBI would oblige with a rate cut in October 1 policy, the RBI Monetary Policy Committee (MPC) kept rates on hold and continued its ‘neutral’ policy stance. This was completely in line with our own expectations.

The MPC is of the view that India’s growth has been resilient despite the global uncertainties caused by tariffs and geopolitical issues. The high frequency indicators are suggesting sustained momentum in Q2FY26, with buoyancy in the services sector, employment conditions remaining steady, capacity utilization rising and domestic demand showing an improvement. The favourable monsoon, low inflation and RBI’s rate cuts, along with the GST rationalization by the Government, should provide further impetus to growth and consumption.

At the same time, the MPC acknowledges that GDP growth is below the RBI’s aspirations, and expects some moderation in the second half of the current fiscal. Consequently, while the MPC has raised its growth forecast for FY26 (full year) from 6.5 percent to 6.8 percent, largely on account of strong growth in H1 (Q2FY26 projected at 7.0 percent), it has lowered its growth forecasts for Q3 and beyond by upto 20 bps.

The RBI is quite satisfied with the soft inflationary trend, with the headline CPI having come down to multi-year lows and expected to stay low. A sharp fall in food inflation as well as benign oil prices have driven the moderation in CPI. Inflation should remain low, with a healthy monsoon, adequate reservoir levels, higher kharif sowing and adequate grain stock buffer. Consequently, RBI has further brought down its CPI forecast for FY26 to 2.6 percent, from its earlier June and August policy forecasts of 3.7 percent and 3.1 percent, respectively. Q2 and Q3 FY26 CPI forecasts have been slashed to 1.8 percent, but Q4 onwards RBI expects inflation to be above 4.0 percent.

On the liquidity front, RBI continues to remain supportive, as evident from the adequate surplus banking system liquidity, barring the brief deficit that emerged in September due to the advanced tax payment outflows. The RBI has been conducting 2-way liquidity operations in the LAF (Liquidity Adjustment Facility) window, consistent with its current neutral policy stance. RBI’s assessment is that the transmission of rate cuts through the banking system has been broad-based across sectors; besides, the remaining portion of the earlier-announced CRR cut will further support liquidity conditions.

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So, with the RBI moderating its growth forecast and further slashing its inflation forecasts, why did the MPC not vote for a rate cut in the October policy?

In fact, the MPC members voted unanimously for holding the policy rates at the current level. It appears that the MPC would like to wait for some time and observe the incoming data with respect to growth and inflation, especially in light of the evolving global and tariff related uncertainties and their potential impact on the domestic economy. Besides, the MPC would like to wait for additional transmission of the earlier rate cuts and the further implementation of the CRR cut. The MPC has therefore currently preferred to use liquidity management tools to keep rates contained, rather than bringing down the policy rate further.

However, the Governor’s speech does suggest a dovish tilt to the MPC’s outlook, as he indicated that the current macroeconomic conditions and outlook have opened up policy space for further supporting growth. This suggests that a December rate cut could be on the anvil, especially considering the revised growth and inflation forecasts. While the MPC voted unanimously to keep policy rates unchanged, a couple of MPC members expressed their views for changing the policy stance from ‘neutral’ to ‘accommodative’.

At this juncture, however, it would be pre-mature to expect anything more than a 25 bps rate cut support from the RBI, considering the fact that there is no major threat to growth (which continues to be robust) and the RBI’s own assessment that CPI inflation would be upwards of 4.0 percent from Q4FY26 onwards, and for a major part of the next financial year.

The debt markets reacted a bit negatively immediately after the policy announcement, disappointed that the RBI did not oblige in this very policy.

The Governor also announced a number of additional measures, including supporting lending activities by banks - (a) raising the limits for bank lending to individuals against listed equity shares and IPO financing, as well as allowing lending without limits against listed debt securities, and (b) making the Expected Credit Loss (ECL) framework of provisioning applicable from 1 April 2027, and providing a glide path to Banks till 31 March 2031.

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