Abhishek Sinha
The Reserve Bank of India (RBI) kept the repo rate unchanged at 5.50%, but shifting dynamics are hinting that a rate cut could be on the horizon. While the central bank retained its stance at “Neutral,” two members of the Monetary Policy Committee (MPC) voted for an “Accommodative” approach, signaling that the debate over easing has begun.
Key Highlights of RBI’s Monetary Policy
| Indicator | Current Status / Projection | Previous Projection | Notes |
|---|---|---|---|
| Repo Rate | 5.50% (Unchanged) | – | Neutral stance retained; 2 MPC members wanted “Accommodative” |
| Inflation (FY26) | 2.6% y/y | 3.1% (Aug’25) | Downward revision of 50 bps; driven by good monsoon, GST rate cuts |
| Core Inflation | Sticky | – | Precious metals, global crude remain risks |
| GDP Growth (FY26) | 6.8% y/y | 6.5% y/y | Upgrade due to strong H1 performance |
| Q3FY26 Growth | 6.4% | 6.6% | Outlook softening |
| Q4FY26 Growth | 6.2% | 6.3% | Growth tapering towards year-end |
| Nominal GDP | 8.5% | 8.5% | No change |
| CAD (FY26) | Manageable | – | Import cover of 11 months; strong forex reserves |
| FDI Inflows (Apr–Jul’25) | USD 10.8 bn (+200% YoY) | – | July 2025 highest in 38 months |
| Bond Yields (G-sec) | 6.50% ± 0.25% | – | Stable, anchored; transmission effective |
| Rate Transmission | ~100 bps cuts passed on | – | Complete to fresh deposits, slower to outstanding deposits |
Inflation Outlook Eases, Scope for Cuts Opens
The most striking takeaway from the policy is the sharp downward revision in consumer inflation projections. RBI now sees inflation averaging 2.6% for FY26, 50 basis points lower than its August 2025 forecast. Favorable monsoons, strong food output, and GST rate rationalisation have kept food prices benign, helping inflation cool faster than expected.
However, volatility remains a risk. Core inflation continues to be sticky due to elevated precious metal prices, while global crude prices remain hostage to geopolitical tensions.
Growth Momentum Strong but Slows in Second Half
RBI has raised India’s FY26 real GDP growth forecast to 6.8%, up from earlier 6.5%. This optimism is built on the back of a stellar first half of FY26. But the central bank acknowledges that growth is set to taper in the coming months.
The governor admitted that while GST rationalisation and fiscal space offer some relief, slowing exports due to tariffs will weigh on momentum. Still, with government borrowing expected to be ₹100 billion below budget estimates, there is fiscal headroom for stimulus if required.
External Position Stable, FDI Flows Surge
On the external front, the RBI remains confident. The Current Account Deficit (CAD) is expected to stay manageable, and India’s forex reserves provide 11 months of import cover, offering a strong cushion despite the rupee hitting all-time lows against the US dollar.
Foreign Direct Investment has surged, with net FDI inflows rising over 200% year-on-year in the first four months of FY26 to USD 10.8 billion.
Bond Market and Banks: Rate Transmission Effective
The RBI noted that the transmission of rate cuts has been highly efficient. Nearly 100 bps of repo cuts since February 2025 have been fully passed on to fresh deposit rates. Lending rates have adjusted faster than outstanding deposit rates, reflecting improving monetary transmission.
Government bond yields are expected to remain stable around 6.50% ± 0.25%, keeping lending spreads low.
Outlook: Rate Cut Likely, Timing Depends on Growth
With inflation sharply down and growth tapering in H2, the case for a 25 bps rate cut in the current cycle has strengthened. The timing, however, will depend on growth momentum in the latter half of FY26.
For now, the RBI has chosen to wait and watch, but the door to an accommodative stance has clearly been opened.
