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RBI monetary policy update: Reserve Bank of India (RBI) Governor Sanjay Malhotra on Wednesday (October 1) said that while global trade tensions and tariff-related uncertainties, particularly with the United States, could weigh on external demand, a series of domestic reforms and favourable monsoon conditions are expected to offset these headwinds.
“Prolonged geopolitical tensions and volatility in international financial markets caused by risk-off sentiments of investors pose downside risks to the growth outlook,” Malhotra cautioned while unveiling the monetary policy review.
The Governor raised the RBI’s FY26 growth projection from 6.5% to 6.8%, citing structural reforms including GST rationalisation. “The implementation of several growth-inducing reforms, many announced by the Prime Minister on August 15, including the streamlining of GST, are expected to cushion the adverse impact of external headwinds,” he said.
The Governor said that the rural economy has received a boost from an above-normal monsoon, strong kharif sowing, and comfortable reservoir levels, which together strengthen the outlook for agricultural output and rural demand. At the same time, buoyancy in the services sector and steady employment conditions are providing a base for urban consumption. Rising capacity utilisation, conducive financial conditions, and improving domestic demand are also expected to facilitate fixed investment in the coming quarters.
The RBI’s optimism follows a stronger-than-expected Q1 performance. India’s real GDP grew by 7.8% in April–June 2025, the highest in five quarters, while gross value added (GVA) rose 7.6%. High-frequency indicators suggest that economic activity sustained its momentum into Q2 as well.
On inflation, the central bank projected a sharper decline than earlier expected, revising its FY26 forecast down to 2.6% from 3.1% in August. The moderation has been driven largely by easing food prices and the impact of GST rationalisation. Headline inflation for Q4 FY25 and Q1 FY26 has also been revised lower and is now broadly aligned with the RBI’s target despite an unfavourable base effect.
“GST rationalisation will lead to a reduction in the prices of several items in the CPI basket, dampening headline prints in the coming months,” Malhotra said. Food inflation too is expected to remain contained through FY26, aided by good harvest prospects and stable supply conditions.
The Monetary Policy Committee (MPC) of the RBI noted that the inflation trajectory is now firmly within the comfort zone, opening up policy space for future support to growth. However, it added that the impact of earlier policy actions, including fiscal measures, is still playing out, and uncertainties linked to tariffs and global developments are unfolding.
While revising growth higher, Malhotra acknowledged that economic activity continues to be below the country’s aspirations. Forward-looking projections for Q3 and beyond are likely to be lower than previously expected, mainly due to external trade-related headwinds. “Even though growth remains resilient, risks from global trade frictions and geopolitical tensions are significant. These are being partly offset by the domestic boost from GST reforms,” he said.
The MPC’s October policy review thus reflects a balancing act— acknowledging resilience in domestic drivers such as agriculture, services, and government spending, while flagging vulnerabilities in external demand.
Given this backdrop, the MPC decided to hold rates steady. “The prevailing uncertainties and tariff-related developments are likely to decelerate growth in H2 this year and beyond. The prudent course of action is to wait for the full impact of frontloaded monetary easing and fiscal measures to unfold before charting the next course,” the Committee noted in its resolution.
By retaining the repo rate at 5.5% and keeping the stance neutral, the RBI has ensured flexibility to respond to evolving data. For borrowers, the status quo means lending rates linked directly to the repo remain unchanged, though banks could still recalibrate MCLR-based loans depending on funding costs.
The October review underscores the RBI’s strategy of cautious optimism. On the one hand, growth has surprised on the upside, inflation has moderated more than expected, and reforms like GST rationalisation are set to strengthen consumption. On the other, external shocks — from US tariffs to volatile global financial markets — pose risks that could spill over into trade and capital flows.
For now, the central bank is content to stay on hold, prioritising stability while keeping its options open. As Malhotra summed up, “Domestic drivers remain resilient, but uncertainties from the external environment require vigilance. The MPC stands ready to act as required to secure growth and stability.”
