Opinion RBI keeps interest rates unchanged. Now, to wait and watch

The October meeting of the RBI’s Monetary Policy Committee was held against the backdrop of subdued inflation and seemingly healthy growth. Retail inflation stayed below the central bank’s inflation target for seven successive months, while the economy grew at a faster than expected 7.8 per cent in the first quarter of the financial year. Alongside, the GST Council, by rationalising the tax structure and bringing down the effective tax rates, provided a boost to consumption. But given the uncertain global environment and concerns over the underlying growth momentum, with Donald Trump’s tariffs putting exports under strain, there were expectations that the MPC should loosen policy further. That was not to be.

The MPC voted unanimously to keep the benchmark repo rate unchanged at 5.5 per cent, even as it acknowledged that the “current macroeconomic conditions and the outlook has opened up policy space for further supporting growth”. Two members of the committee did, however, advocate for a change in stance from neutral to accommodative. The central bank’s projections indicate the space for further rate cuts with inflation coming in well below earlier expectations. As per its latest forecasts, retail inflation has been pegged at 2.6 per cent in 2025-26, down from its August assessment of 3.1 per cent and the June projection of 3.7 per cent. Much of this has been due to benign food prices. Core inflation has also been subdued, and excluding precious metals, was at just 3 per cent in August. The GST rate rationalisation has also led to a reduction in prices. And though unfavourable base effects are expected to push up headline inflation next year, it is likely to remain under control.

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On growth, the central bank has revised its forecast upwards, pegging the economy to grow at 6.8 per cent in 2025-26, from its earlier estimate of 6.5 per cent. As per the central bank, recent reforms and GST rate rationalisation “are expected to offset some of the adverse effects” from the external sector. However, the underlying momentum is expected to slow down next year, with the RBI projecting growth at 6.2 per cent in the fourth quarter, and 6.4 per cent in the first quarter of 2026-27. Nonetheless, considering that the full impact of the policy measures is still unfolding in the system, the committee has opted to wait for greater clarity to emerge. Further policy steps will depend on whether or not growth disappoints and/or inflation comes in lower than expectations.