RBI Monetary Policy: Repo Rate Retained But 'Space There For Cuts'; Inflation Outlook Lowered

The Reserve Bank of India's Monetary Policy Committee, led by RBI Governor Sanjay Malhotra, retained the benchmark repo rate at 5.5%, after front-loading the three rate cuts in February, April and June this year. However, the RBI revised the CPI inflation forecast downward while revising the GDP growth forecast upward.

Space for monetary action has opened up, Malhotra said, adding that the MPC considers it prudent to wait before beginning to cut rates further.

Amidst benign inflation, prevailing global uncertainties and tariff-related developments are likely to decelerate growth in H2:2025-26 and beyond, stated the resolution of the MPC. "The current macroeconomic conditions and the outlook have opened up policy space for further supporting growth," it stated.

After the review, the Monetary Policy Committee decided the following:

• To maintain the policy repo rate at 5.5% unanimously.

• The standing deposit facility rate, pegged 25 basis points below the repo rate, remains unchanged at 5.25%.

• The marginal standing facility rate, which is 25 basis points above the repo rate, remains unchanged at 5.75%.

The committee also retained its stance at 'neutral'.

CPI Inflation: Revised Downward

Speaking about inflation, the RBI Governor said that the inflation outlook has turned even more benign than previously estimated.

• Healthy progress of the southwest monsoon, higher Kharif sowing, adequate reservoir levels and a comfortable buffer stock of food grains should keep food prices benign.

• The recently implemented GST rate rationalisation would lead to a reduction in prices of several items in the CPI basket.

• Despite the anticipation of moderate momentum during H2, large unfavourable base effects are likely to exert upward pressure on headline CPI inflation, especially in Q4.

The RBI revised the inflation forecast from 3.7% in June to 3.1% in August to 2.6% in October. CPI inflation is projected at 1.8% for Q2 and Q3, 4% for Q4, and 4.5% for Q1 next year.

GDP Growth: Revised Upward

Growth continues to be below expectations, Malhotra said, despite an upward revision to the full-year forecast. The implementation of several growth-inducing structural reforms, including streamlining of GST, are expected to offset some of the adverse effects of the external headwinds.

• Looking ahead, an above-normal monsoon, good progress of kharif sowing and adequate reservoir levels have further brightened prospects of agriculture and rural demand.

• Buoyancy in the services sector coupled with steady employment conditions are supportive of demand, which is expected to get a further boost from the rationalisation of goods and services tax (GST) rates.

• Rising capacity utilisation, conducive financial conditions, and improving domestic demand should continue to facilitate fixed investment. However, ongoing tariff and trade policy uncertainties will impact external demand for goods and services.

• Prolonged geopolitical tensions and volatility in international financial markets caused by risk-off sentiments of investors also pose downside risks to the growth outlook.

Real GDP growth is projected at 6.8%, up from 6.5% estimated previously. Q2 is projected at 7%, Q3 at 6.4%, and Q4 at 6.2%. Q1 next year is projected at 6.4%. Risks are evenly balanced.

The RBI will continue to actively manage liquidity to anchor rates, the Governor said.