The RBI maintained a status quo on rates to support growth amid mixed signals, while remaining vigilant to emerging inflation risks and external vulnerabilities.
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The RBI continues to preserve monetary space, keeping itself positioned to deliver a rate cut if required. Market participants expect that any policy action will be contingent on the evolving impact of GST rationalization on consumer demand and investment pickup.
Current dynamics, especially the recent move to a two-slab GST and the imposition of additional 25% tariffs on general goods and 100% on select pharma exports, are being closely monitored by the RBI, especially amid lingering geopolitical uncertainties and ongoing pressures in the US economy.
Domestic inflation remains well contained, with headline CPI averaging around 2.5%, core remains anchored near 4% and our food and fuel index even shows a deflation of 1.15% YoY in Sept-25; only a slight uptick in food prices is expected due to aboveaverage monsoon rainfall in some regions.
Going forward, due to unfavorable base effects, inflation could move upwards to 4% in H2 FY26. Growth indicators remain moderate, with IIP and core sector data reflecting a gradual but steady recovery led by infrastructure and capital goods.
Rural demand is stabilizing, as seen in positive tractor sales, while government capex continues to provide a strong boost. Liquidity remains comfortable, supported by a durable surplus and the upcoming phased CRR cuts. Credit growth at 9–10% is stable, though skewed more towards services and personal loans.
Monetary transmission remains efficient in the overnight market; however, public sector banks have lagged in passing on rate reductions to borrowers, while foreign banks have adjusted more swiftly across both deposit and lending rates.
Externally, merchandise exports have been resilient despite new tariffs, though labor-intensive sectors such as gems, textiles, and seafood are showing signs of stress.
Continued uncertainty on trade agreements may necessitate a more proactive RBI stance, especially as rupee depreciation offsets some adverse tariff effects, and further FPI outflows loom.
To summarise, the RBI's approach remains data-driven and responsive, with future action contingent on policy clarity around GST rationalization and tariff transmission. With ample liquidity, subdued inflation, and fiscal support through GST reforms, growth remains well supported, even as global uncertainties linger.
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