Why in news?

The RBI’s Monetary Policy Committee (MPC) kept the repo rate unchanged at 5.5% with a ‘neutral’ stance on October 1, 2025, after already cutting rates by 100 bps this year.

With retail inflation projected to average 2.6% in 2025-26, well below the 4% target, the RBI has space for future cuts but chose to “keep its powder dry.”

Instead of relying only on rate changes, the RBI unveiled 22 structural measures to spur growth through regulatory easing and reforms. Economists noted the central bank’s message: growth support can extend beyond interest rates, with a focus on long-term stability and resilience.

What’s in Today’s Article?

• RBI Monetary Policy October 2025: Growth Focus with Stability
• Why RBI kept repo rate unchanged?

RBI Monetary Policy October 2025: Growth Focus with Stability

• Repo rate unchanged at 5.5% with a neutral stance.
  • A neutral stance implies that the central bank neither seeks to stimulate the economy nor tighten liquidity, balancing efforts to control inflation without impeding growth.
• RBI balances growth momentum with financial stability.
• Inflation projected well below target, creating policy space for future easing.
• Stronger Growth Ahead
  • GDP growth forecast revised up to 6.8% for FY 2025-26 (from 6.5%).
  • Drivers: strong consumption, rising investments, government spending, good monsoon, GST 2.0, and better credit flow.
  • Quarterly projections: Q1 – 7.8%, Q2 – 7.0%, Q3 – 6.4%, Q4 – 6.2%.
  • FY 2026-27 growth estimated at 6.6%, assuming stability and normal monsoon.
  • Consumer optimism remains high in both urban and rural households.
• Global Agencies Reaffirm Growth
  • Agencies highlight resilience amid global uncertainties:
    • IMF – 6.4% (FY26)
    • Fitch – 6.9% (FY26), 6.3% (FY27)
    • S&P Global – 6.5% (FY26)
    • UN – 6.3% (FY26), 6.4% (FY27)
    • OECD – 6.7% (FY26)
  • Confidence reinforced by structural reforms, strong domestic demand, and vibrant services sector.
• Prices Stay Stable
  • CPI inflation forecast cut to 2.6% for FY 2025-26 (earlier 3.1%).
  • Inflation fell to 1.6% in July 2025, an 8-year low.
  • Driven by 9-month food price decline (-10.5%) and milder summer temperatures.
  • GST rationalisation (Sept 2025) reduced consumer prices for 11.4% of the CPI basket.
• Global Demand Steady
  • Current account deficit narrowed to 0.2% of GDP in Q1 FY 2025-26 (from 0.9% a year ago).
  • Supported by services exports and record remittances (US$35.3 billion).
  • Merchandise exports up 2.5%, imports up 2.1% (Apr–Aug 2025).
  • Gross FDI inflows at US$ 37.7 billion; net inflows at US$ 10.8 billion.
  • Major contributors: Singapore, US, Mauritius, UAE, Netherlands.

Why RBI kept repo rate unchanged?

• During recent MPC meet, the RBI adopted a neutral stance — recognising strong domestic momentum, low inflation, and reforms as positives, but staying vigilant about external risks.
• Stability is prioritised for now, while keeping options open for future rate action if needed.
• External Headwinds: Global Uncertainty
  • Trade tensions and tariffs with the US may hurt external demand.
  • Geopolitical risks and volatility in global financial markets remain downside risks.
  • These global shocks could spill over into India’s trade flows and capital markets, warranting caution.
• Domestic Tailwinds: Growth Drivers
  • GDP Growth Upgrade: RBI revised FY26 projection to 6.8% from 6.5%, citing reforms and strong demand.
  • Reform Push: GST rationalisation and structural reforms announced in August are expected to cushion external shocks.
  • Agriculture & Rural Boost: Above-normal monsoon, kharif sowing, and reservoir levels support farm output and rural demand.
  • Urban Consumption: Buoyancy in services sector and stable jobs lift consumption.
  • Investments Rising: Capacity utilisation, conducive financial conditions, and improving domestic demand will aid fixed investment.
• Inflation: Well Within Comfort Zone
  • CPI Inflation Revised Down: FY26 forecast cut to 2.6% from 3.1%, driven by falling food prices and GST rationalisation.
  • Food Inflation Stable: Good harvest prospects and stable supply keep food prices in check.
  • Impact of GST Reforms: Lower CPI prices for multiple items reduce headline inflation.
  • Inflation trajectory firmly within the 2–6% RBI comfort zone, opening space for growth support later if needed.
• Growth vs Risks: The Balancing Act
  • Upside Surprise: Q1 FY26 GDP grew 7.8%, fastest in five quarters.
  • Caution Ahead: Q3 growth expected to slow due to trade frictions and tariffs.
  • MPC highlights that while domestic drivers are resilient, external vulnerabilities remain significant.
• Rationale for Holding Rates
  • Wait-and-Watch Approach: Earlier frontloaded monetary easing and fiscal measures are still working through the system.
  • Policy Flexibility: Keeping repo steady ensures the RBI retains room to cut if external shocks worsen.
  • Borrower Impact: Lending rates linked to repo remain unchanged; MCLR loans may adjust with banks’ cost of funds.