RBI holds rates, raises FY26 GDP growth forecast amid tariff headwinds

MUMBAI: The Reserve Bank of India led by governor Sanjay Malhotra kept the benchmark repo rate unchanged at 5.50% for the second straight time on Wednesday. The central bank also maintained its ‘neutral’ stance.

As widely expected, the central bank's Monetary Policy Committee (MPC) opted to hold rates steady during its October review. Of the 61 economists polled by Reuters, 45 had forecast a status quo, while 16 had expected a 25-basis point cut.

The possibility of a rate cut was fuelled by retail inflation undershooting the central bank's estimates and ongoing economic uncertainty, including that arising from then-US President Donald Trump’s tariff policy.

The last time the MPC adjusted rates was in June with a significant 50 basis point cut. This followed earlier reductions in February and April. Since February, the six-member MPC has reduced repo rates by a cumulative 100 bps.

In today's decision, the MPC also kept the standing deposit facility (SDF) rate unchanged at 5.25% and the marginal standing facility (MSF) rate at 5.75%.

Inflation trajectory

Headline retail inflation, based on Consumer Price Index (CPI), dropped to an eight-year low of 1.6% in July before edging up to 2.1% in August—its first rise since October 2024. The MPC said benign food prices, helped by a good monsoon, kharif sowing and food grain stocks, should keep inflation contained.

It expects GST rationalization to further lower several CPI components, making the inflation outlook softer than the August projection. Still, base effects could push CPI higher in Q4.

The MPC cut its FY26 inflation forecast to 2.6% from 3.1%. Q2 inflation is now projected at 1.8% (vs 2.1%), Q3 at 1.8% (vs 3.1%), and Q4 at 4% (vs 4.4%). CPI inflation for Q1FY27 is pegged at 4.5%, down from 4.9%.

“The current macroeconomic conditions and the outlook has opened up policy space for further supporting growth. However, the MPC noted that the impact of front-loaded monetary policy actions and the recent fiscal measures is still playing out… it considered it prudent to wait for greater clarity before charting the next course of action,” the monetary policy statement said.

Manoranjan Sharma, chief economist, Infomerics Ratings, said the RBI’s careful calibration underscores its balancing act. By not “rushing into rate cuts,” he said, the central bank has kept room to manage inflation while supporting sustainable growth. Maintaining a neutral stance, he added, ensures flexibility in a still uncertain environment.

RBI governor Sanjay Malhotra also stressed that India’s external sector remains resilient and external obligations will be met comfortably. On the rupee’s recent volatility, he said: “RBI is keeping a close watch on movements of the INR and will take appropriate steps, as warranted.”

Economists believe the government’s recent Goods and Services Tax (GST) rate rejig could provide a mild disinflationary push in the near term by lowering prices for select goods and services. Assuming a greater than 70% pass-through of GST cuts, Emkay Global Financial Services has projected headline CPI inflation at 2.2% for the current financial year, which is lower than the RBI’s updated 2.6% projection.

About 85-90% of net disinflation may come from core CPI, followed by food and beverages. Brokerages expect the GST rationalization impact on CPI to be evident within the next three months, with sectors such as auto already announcing price resets.

GDP growth

“Available high frequency indicators suggest that economic activity continues to remain resilient. Rural demand remains strong, riding on a good monsoon and robust agriculture activity, while urban demand is showing a gradual revival,” the policy statement said.

Real GDP growth beat expectations in Q1FY26, expanding 7.8% on the back of strong private consumption and fixed investment. The committee expects a good monsoon, steady kharif sowing and reservoir levels to support rural demand, while GST rationalization, rising capacity utilization and robust domestic demand should sustain growth. However, tariff and trade policy uncertainties, geopolitical tensions and financial market volatility pose risks.

Reflecting these factors, the MPC revised its GDP growth forecast for FY26 to 6.8% from 6.5%. Q2 growth is now seen at 7% versus 6.7% earlier.

The RBI governor cautioned that growth projections from Q3 onwards have been pared due to tariff-related headwinds.

“Growth outlook remains resilient supported by domestic drivers, despite weak external demand. It is likely to get further support from a favourable monsoon, lower inflation, monetary easing and the salubrious impact of recent GST reforms. However, growth continues to be below our aspirations,” Malhotra said.

The MPC now pegs GDP growth for Q3FY26 at 6.4% against 6.6% earlier, for Q4 at 6.2% versus 6.3%, and for Q1FY27 at 6.4% compared with 6.6% previously.

Announcement-heavy policy

In the absence of a rate cut, the governor unveiled 22 additional measures aimed at strengthening banking resilience, improving credit flow, simplifying foreign exchange management, enhancing consumer satisfaction, and pushing forward the internationalisation of the rupee.

These included a glide path till March 2031 for banks to comply with the Expected Credit Loss (ECL) framework, a reduction in risk weights on loans to MSMEs, residential real estate and NBFC infrastructure projects, and the introduction of risk-based deposit insurance premiums.

The RBI also withdrew restrictions on overlaps between banks and their group entities, allowed banks to finance acquisitions by Indian corporates, and removed ceilings on lending against listed debt securities while expanding limits for IPO financing.

Further, it withdrew exposure limits on large corporates, measures that together signal a significant easing of regulatory constraints to support credit growth and corporate activity.