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Repo rate: What could push RBI MPC to hold or cut?

Most economists expect that the MPC would continue to maintain the status quo in the upcoming monetary policy, to be announced on October 1. What happens to lending rates?

RBI governor Sanjay Malhotra during the monetary policy announcement at the RBI headquarters. (Express photo by Amit Chakravarty)

The Reserve Bank of India (RBI) Monetary Policy Committee will meet from September 29 to October 1, and is widely expected to keep the repo rate unchanged for the second consecutive time amid strong GDP growth and expectations of benign inflation. A section of economists, however, see a possibility of a repo rate cut in the upcoming policy. The six-member rate-setting panel is unlikely to alter its present ‘neutral’ monetary policy stance.

What can be anticipated from the monetary policy?

Most economists expect that the MPC would continue to maintain the status quo in the upcoming monetary policy, to be announced on October 1. This would be the second time in a row that the RBI may take a pause. Between February and June 2025, the repo rate has been cut by 100 bps to 5.5 per cent currently.

“The Monetary Policy Committee is anticipated to maintain the status quo on the repo rate in its October 2025 review. This view is supported by the positive impact of GST reforms on demand, stronger-than-expected Q1 FY26 GDP growth, and an inflation trajectory that, while lowered due to GST rationalisation (FY26 average now ~2.6 per cent), is expected to slope upwards thereafter,” said Aditi Nayar, chief economist, ICRA Ltd.

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In the April-June 2025 quarter, GDP growth rose to a five-quarter high of 7.8 per cent, compared to 6.5 per cent in the year-ago period and 7.4 per cent in January-March 2025.

The government has introduced a two-slab structure of 5 per cent and 18 per cent, effective September 22, abolishing the earlier four-rate tax regime. Lower GST rate will further strengthen the consumption growth drivers.

“RBI is likely to remain on pause in October awaiting clarity on GST impact and tariffs,” said Gaura Sengupta, chief economist, IDFC FIRST Bank. RBI’s assessment on current growth conditions is positive with pickup in rural demand and government capex. Meanwhile urban consumption and private capex remain subdued, she added.

However, some economists are of the view that the MPC may go for a rate cut.

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State Bank of India (SBI’s) group chief economic advisor Soumya Kanti Ghosh said there is a merit and rationale in going for a rate cut, but this will require calibrated communication by the RBI as, post June, the bar for rate cut is indeed higher.

“No point in committing a Type 2 error (no rate cut with neutral stance) in September also … A 25 bps rate cut in September is the best possible option for RBI,” Ghosh said in a recent report. He added that a rate cut in September is the best possible option for RBI, which also projects it as a forward-looking central bank.

Nomura economists anticipate two further cuts, during October and December meetings.

“As the market is currently only pricing in around 10 bps of cuts over the next few months, we see the risk/reward as attractive,” Nomura said in a report.

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According to Goldman Sachs, the headline inflation is expected to remain benign on lower food inflation and pass-through of lower GST rates to consumer prices. In August, headline inflation accelerated to 2.7 per cent from an eight-year low of 1.61 per cent in July.

“Assuming a partial pass-through of lower GST rates, we recently lowered our headline inflation forecasts for CY25 and FY26 by 0.2 percentage points and 0.3 percentage points to 2.8 per cent year-on-year,” Goldman Sachs said in a report.

The MPC meet is happening at a time when India and the US are in discussions to finalise a trade deal. US President Donald Trump has imposed an additional 25 percent tariff on Indian goods from August 27, taking the total tariff to 50 per cent. The outcome of these talks is expected to have a significant impact on the country’s economic growth.
The meeting also comes after the US Federal Reserve’s decision to lower its interest rate by 25 bps to 4-4.25 per cent, marking its first cut in 2025.

Editorial | RBI keeps interest rates unchanged. But what will dictate policy action?

Is a change in the policy stance expected?

Economists believe that the MPC will maintain the ‘neutral’ stance in the forthcoming policy. In the June 2025 policy, the MPC had changed the policy stance to neutral from accommodative. A neutral stance will mean that the rate can move in either direction, depending on the evolving economic data.

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Will RBI revise GDP and inflation forecast?

Bank of Baroda’s Chief Economist Madan Sabnavis expects the Reserve Bank to keep the GDP forecast unchanged but may lower inflation projection by 0.5 per cent for FY26.

In the August policy, RBI retained its real GDP growth projection at 6.5 per cent in FY26 but sharply lowered its inflation estimate to 3.1 per cent from an earlier expectation of 3.7 per cent.

“The GST rationalisation could dampen the headline CPI (consumer price index) prints by 25-50 bps during Q3 FY26-Q2 FY27 relative to our pre-GST rationalisation estimates, taking the average for FY26 to around 2.6 per cent (vs 3 per cent earlier),” said Nayar of ICRA.

While October-November 2025 may mark a fresh low for the CPI inflation, the trajectory subsequently remains upward sloping, she added.

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The RBI has projected CPI inflation at 3.1 per cent in Q3 FY26; 4.4 per cent in Q4 FY26, and 4.9 per cent in Q1 FY27.

What happens to lending rates if the repo rate is left unchanged?

If the RBI leaves the repo rate steady at 5.5 per cent, all external benchmark lending rates (EBLR) linked to the repo rate will not be changed. However, lenders may revise their interest rates on loans that are linked to the marginal cost of fund-based lending rate (MCLR).