SWAIN SECURITIES

RBI Monetary Policy: Why Rates Stayed Put & Growth is Upbeat 📈

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) on October 1, 2025, delivered a widely anticipated “dovish pause”, holding the key interest rates steady while significantly upgrading its outlook for economic growth. This decision signals a focus on maintaining stability and supporting the current robust growth momentum in the face of cooling inflation and lingering global uncertainties.

Key Takeaways: Status Quo on Rates, Optimism on Growth

The central announcement from the MPC meeting was the unanimous decision to keep the Repo Rate unchanged at 5.50% and maintain the ‘Neutral’ policy stance. This marks the second consecutive pause after a cumulative 100-basis point reduction earlier in the year.

While the rate decision was predictable, the revisions to economic projections painted an increasingly optimistic picture of the Indian economy:

GDP Growth Forecast: The RBI sharply raised its real GDP growth forecast for FY 2025-26 to 6.8%, up from its previous estimate of 6.5%. This upgrade reflects confidence driven by strong domestic consumption, robust investment activity, and the positive impact of a good monsoon.

Inflation Outlook: The CPI inflation forecast for FY 2025-26 was slashed to 2.6%, down from 3.1% earlier. This substantial revision is credited to a prolonged decline in food prices and the positive impact of the recent rationalisation of Goods and Services Tax (GST) rates. Inflation remains well within the RBI’s target range.

Why the ‘Wait and Watch’ Approach?

Despite low inflation and high growth, the MPC opted for stability. The decision to keep the ‘Neutral’ stance—which allows for a rate move in either direction—reflects a cautious balancing act.

Global Uncertainty: The Governor highlighted the persistent “clouded” global outlook, citing trade uncertainties, geopolitical tensions, and volatility in international financial markets as key risks. The MPC is waiting to assess the full impact of these external headwinds, particularly on exports, before committing to a further rate trajectory.

Lagged Effect of Policy: The MPC believes the full impact of the front-loaded rate cuts earlier in the year and recent fiscal measures, such as the GST reforms, is still working its way through the economy. A pause allows for a clear assessment of transmission.

Forward-Looking Inflation: While current inflation is low, the RBI projects it to pick up in the fourth quarter of FY26 due to base effects and improving demand. Maintaining the current rate helps anchor inflation expectations for the long term.

Major Developmental & Regulatory Boosts

Beyond rate decisions, the RBI announced significant measures to improve credit flow and financial stability, which are arguably the most impactful part of the policy:

Boost to Credit Flow: New enabling frameworks were announced for banks to finance corporate acquisitions by Indian companies, widening lending opportunities.

Capital Market Easing: Limits for bank lending against shares and for Initial Public Offering (IPO) financing were substantially increased, from ₹20 lakh to ₹1 crore and ₹10 lakh to ₹25 lakh per person, respectively.

Infrastructure Financing: Risk weights for NBFC lending to high-quality, operational infrastructure projects will be reduced, which should lower financing costs for a crucial sector.

What it Means for You: Investors & Consumers

The October 2025 policy is a vote of confidence in India’s structural growth story. For borrowers, the stable Repo Rate means that lending rates, including home loan EMIs, are likely to remain steady in the near term. Equity investors cheered the policy’s pro-growth tilt and positive economic forecasts, with markets closing higher. The focus on structural reforms to ease credit is expected to fuel broader economic activity and investment in the coming quarters. While a rate cut is off the table for now, the door remains open for a potential easing towards the end of the year if inflation remains benign and global risks subside.