Mumbai, India – London, UK

The Reserve Bank of India (RBI) is widely expected to keep its key lending rate, the repo rate, unchanged at 5.50% following the conclusion of the latest Monetary Policy Committee (MPC) meeting. This anticipated pause comes as the central bank navigates a complex economic environment characterized by inflation consistently below its target but also a noticeable moderation in private sector growth momentum and significant global trade uncertainties.

Headline Points

 * Repo Rate Holds at 5.50%: A strong consensus among economists predicts the RBI’s MPC will maintain the repo rate at 5.50%, extending the pause that began with the August policy meeting.

 * Moderating Private Sector Growth: Recent data, including the Composite Purchasing Managers’ Index (PMI), shows that the strong private sector expansion has lost some steam, with slower growth in both factory output and services activity in September.

 * Below-Target Inflation: Retail inflation has been below the RBI’s 4% target for the seventh consecutive month, offering substantial headroom for a rate cut, but the MPC is prioritising cautious monitoring of the domestic and global outlook.

 * Global Uncertainty Dims Outlook: Persistent global trade friction, particularly the uncertainty surrounding potential US tariffs, is a major factor driving the RBI’s cautious stance, prompting the decision to “backload” any further rate reductions.

 * Neutral Stance Maintained: The MPC is expected to maintain its “Neutral” policy stance, signaling its readiness to move in either direction—cutting rates if growth risks intensify, or holding firm if unforeseen inflationary pressures emerge.

A Pause to Assess Previous Easing

The Reserve Bank of India’s Monetary Policy Committee, led by Governor Sanjay Malhotra, is set to announce its decision on Wednesday, October 1. The expectation of a hold at 5.50% follows a period earlier this year where the RBI front-loaded a cumulative 100 basis points of rate cuts between February and June, including a significant 50 basis points reduction.

Policymakers appear to be in a “wait-and-watch” mode, seeking to observe the full impact of this substantial previous easing on credit markets and broader economic activity before committing to further cuts.

This cautious approach is also heavily influenced by external factors. The ongoing risk of escalating global trade tensions, particularly concerning US tariffs, poses a major downside risk to India’s export and growth outlook. Economists suggest that the RBI is keen to retain policy space to use later in the year, such as in the December policy meeting, should the trade drag start showing up more prominently in economic data.

Domestic Momentum Loses Steam

While India’s overall GDP growth has remained resilient, the latest high-frequency indicators show a cooling in the private sector. The Composite PMI for September, which tracks both manufacturing and services, indicated that the previously strong expansion has moderated. Growth in new business and job creation has slowed down, suggesting that while the economy is still growing robustly, the impetus from the private sector is not accelerating, raising concerns about the sustainability of momentum.

This moderation in private-sector activity provides a strong argument for those urging a rate cut to provide an immediate fillip to domestic demand, especially as the festival season begins. However, the RBI appears to be weighing this against the immediate boost expected from the newly implemented two-tier and sharply reduced Goods and Services Tax (GST) regime, which is anticipated to spur consumption.

The Inflation Dilemma

On the price front, the RBI is in a comfortable position. Retail inflation has consistently undershot the MPC’s medium-term target of 4% (±2%), falling to 2.7% in August. This consistent benign inflation environment has been the primary argument for those advocating for an immediate 25 basis points rate cut. Advocates for a cut argue that, as a forward-looking central bank, the RBI should capitalise on the easing price pressures to support growth proactively.

Nevertheless, the MPC is likely to remain focused on the potential for a rebound in inflation further out, as some projections indicate a rise above the 4% target in the first half of fiscal year 2026. For now, the MPC is expected to maintain its “Neutral” stance, signalling that while the bias is towards supporting growth, it will not hesitate to react if the domestic or global risk landscape shifts unexpectedly. The ultimate policy decision will be a finely balanced act between nurturing domestic demand and guarding against unforeseen global headwinds.

The RBI is expected to retain its GDP growth forecast of 6.5% for FY26 while likely revising its inflation projection downward, cementing its data-driven, calibrated approach.