Behind RBI's October pause: Keeping powder dry for future rate action

India’s monetary policy committee unanimously voted to keep interest rates unchanged earlier this month to keep the powder dry and leave room for future cuts depending on the situation, showed minutes released on Wednesday.

However, there were differences around the stance of the monetary policy among members of the panel of six, with two external candidates — Nagesh Kumar and Ram Singh — in favour of changing it from neutral to accommodative. An accommodative stance would signal that the central bank supports growth and indicates that interest rates could go down, whereas a neutral stance allows the rate-setting panel to decide the course based on fresh data.

“There is elevated uncertainty on the external front,” said governor Sanjay Malhotra. “...even though there is policy space to further cut the policy rate, I feel this is not the opportune time for the same as it will not have the desirable impact.”

Malhotra pointed out that although growth remained strong, its outlook is softer and is expected to be below RBI’s aspirations. On 1 October, the MPC raised its growth forecast for FY26 to 6.8% from 6.5% earlier. It also cut its FY26 inflation forecast to 2.6% from 3.1%.

He said that the benign outlook for headline and core inflation opens up policy space to further support growth. But he, like other panel members, was in favour of waiting for the full impact of fiscal and monetary measures to permeate through the economy, even as tariff-related uncertainties remain.

The MPC has lowered the repo rate by 100 basis points (bps) since February, with an outsized and surprising 50-basis point cut in June alone. One basis point equals a hundredth of a percentage point.

Consumer sentiment

Deputy governor Poonam Gupta said that while the recent measures announced by the government have significantly bolstered consumer sentiment, these measures are still working their way through.

The government recently limited the goods and services tax (GST) slabs to 5% and 18% and moved several categories of products to lower rates. It has pegged the revenue shortfall from GST cuts at ₹48,000 crore a year based on 2023-24 consumption data.

“It would be prudent for the impact of these measures to be sufficiently realized before taking another supportive measure right away,” said Gupta.

She added that even the policy rate cuts announced by the RBI during this calendar year are currently being transmitted through the system and announcing a rate cut at this time may only be marginally effective. Moreover, given that the global uncertainties are evolving at a fast pace, “depleting policy ammunition at this point does not seem warranted until there is more clarity on how the global policy environment will unfold henceforth”.

Indranil Bhattacharyya, RBI's executive director and the newest member of the committee, said that while a sharp moderation in inflation has opened up policy space for further rate easing, it is best to pause.

Bhattacharya said the heightened uncertainty would not allow a rate cut to have the intended impact; one needs to allow past monetary and fiscal measures to work their way through the financial system; and that it was better to not surprise the market that was not expecting a rate cut in October. On the change of stance, Bhattacharya, who was in favour of retaining the neutral stance, said that changing it to accommodative could suggest that rates can only go down.

“Such precise guidance needs to be avoided since a neutral stance is not inconsistent with a rate cut,” he said.

External uncertainty

Meanwhile, external member Ram Singh said that since the last MPC meeting, the case for another rate cut in this cycle has become stronger. However, in view of the fiscal measures and the earlier monetary easing still working, and the uncertainty on the external front looming large, he voted for a pause in the policy repo rate.

Trump’s tariffs on the world’s fifth-largest economy—one that he has often referred to as ‘tariff king’—are expected to hit sectors particularly exposed to exporting goods to the US. Mint reported on 13 October that with the 2025 fall deadline for the India-US bilateral trade agreement (BTA) approaching, the two sides have intensified activity to bridge differences on a bunch of issues.

“Despite the continuing moderation in inflation opening up space for further monetary policy easing, the arguments for a pause in my August 2025 statement remain materially the same,” external member Saugata Bhattacharya said.

According to Bhattacharya, a moderation in the inflation rate is not a compelling reason, at this point, to cut the policy rate. Citing RBI’s monetary policy report, he said that forecasts show an average FY27 inflation of 4.5%, with Q1 and Q2 FY27 also at 4.5% and Q3 at 5.1%, while assuming a normal monsoon and no exogenous shocks.

Lastly, summing up US’ action against India, external member Nagesh Kumar said the Trump Administration has delivered a comprehensive assault on India with successive announcements over the past few weeks. “The trade policy measures adopted by the US, India’s biggest trade partner and biggest market for exports of goods and services, pose challenges for the economy. While the effect on the economic growth rate may be limited to between 40-60 bps, a larger effect is expected on MSMEs and jobs,” said Kumar.

While highlighting the importance of pre-emptive action to contain the damage and support private investments, Kumar was in favour of waiting for the transmission of the existing actions to finish.