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Informist, Saturday, Sept. 20, 2025

 

By Shubham Rana

 

NEW DELHI - The Reserve Bank of India's Monetary Policy Committee is likely to keep interest rates on hold for the second consecutive meeting next month after the GDP grew much quicker than expected in the June quarter, according to economists polled by Informist. The MPC may prefer to wait and watch the impact of the recent changes to the goods and services tax and await more clarity on US tariffs on India before deciding on the next interest rate action, economists said.

 

Eleven of the 15 economists polled expect the MPC to leave the repo rate unchanged at 5.50% at the end of the three-day meeting on Oct. 1. Barclays, Capital Economics, Morgan Stanley, and Nomura forecast a 25-basis-point interest rate cut at the meeting.

 

The MPC has reduced the policy repo rate by 100 bps so far in 2025. It started lowering interest rates in February with a 25-bps cut, followed by another 25-bps cut in April, and a larger-than-expected 50-bps reduction in June.

 

In August, the six-member panel unanimously left the repo rate unchanged at 5.50% because of the uncertainty around the impact of US tariffs on India's exports and economic activity. The US has imposed a 50% tariff on India, 25% of which is for New Delhi's continuous buying of crude oil from Russia.

 

Economists forecast a nearly 50-bps hit to India's GDP growth if the 50% tariff persists, though the two nations have restarted negotiations on a bilateral trade agreement recently. This hit to headline growth, however, is expected to be offset by the overhaul of the GST. Starting Monday, the number of GST slabs will be reduced to two--5% and 18% with a special 40% slab for sin and luxury goods--with prices expected to come down for a large number of goods.

 

"For monetary policy, growth backdrop is far better going forward after GST revision despite US tariffs," ICICI Bank said in a report. "Given that both (impact of GST cut and US tariffs) should largely neutralise each other, we don't see RBI cutting rates in the current financial year."

 

The changes to the GST are expected to push up GDP growth by nearly half a percentage point, economists said. India's GDP grew at a five-quarter high pace of 7.8% in the June quarter. This was 130 bps higher than the RBI's forecast of 6.5%.

 

The higher-than-expected GDP growth in the first quarter of FY26 could force the RBI to raise its growth forecast for the current financial year. The central bank in August retained its growth projection for the year at 6.5%, which was considered optimistic by economists at the time. The GST rate revisions could also add to the headline growth this year, especially if the US lowers the tariffs on India.

 

The Indian central bank may lower its CPI inflation forecast for FY26 even more on Oct. 1 because of lower-than-expected headline prints in recent months. The RBI in August lowered its inflation projection for the current financial year by 60 bps to 3.1%.

 

CPI inflation fell to an eight-year low of 1.61% in July and rose to 2.01% in August, still much lower than the RBI's medium-term target of 4.00%. Thanks to the GST cuts, economists expect inflation to fall below 2.00% in September and October. As such, the RBI may also lower its inflation forecast for the year.

 

"Upgrade in growth forecast and downward revision in inflation forecast that is mainly led by one-off factors should keep RBI MPC on status-quo," economists at ICICI Securities Primary Dealership said in a report. "The catalyst for additional easing from the committee is likely to remain contingent on any build-up of growth concerns, in our view."

 

Low inflation could, however, open up space for a rate cut in October, economists said. "Pencilling in the downside to CPI, coupled with the weaker trend in nominal GDP growth, even as real GDP growth held up, we opine RBI to ease rates by 25 bps each, both in the Oct and Dec policy, taking the terminal policy rate to 5%," Morgan Stanley said in a report.

 

A key factor for the MPC rate decision could be the inflation forecast for the March and the June quarters of 2026. The RBI projects inflation to rise to 4.4% in Jan-Mar and to 4.9% in the June quarter next year. Expectation of a rise in inflation in the first half of 2026 was a key reason why the MPC held interest rates in August.

 

According to economists at YES Bank, prices may see a one-time fall due to the GST cut, RBI might want to look through the same for now, to assess the impact of the tax cuts on consumption demand, its impact on growth and prices. "Thus, we see RBI staying on a pause in October."

 

The following are expectations of respondents from the Sept. 29-Oct. 1 meeting of the MPC:

 

ORGANISATION	OCTOBER MEET EXPECTATION
Bank of Baroda	Status quo
Barclays	25 bps cut
Capital Economics	25 bps cut
DBS Bank	Status quo
HDFC Bank	Status quo
ICICI Bank	Status quo
ICICI Securities Primary Dealership	Status quo
India Ratings and Research	Status quo
ICRA	Status quo
Kotak Mahindra Bank	Status quo
Morgan Stanley	25 bps cut
Nomura	25 bps cut
Standard Chartered	Status quo
State Bank of India	Status quo
YES Bank	Status quo

 

End

 

Edited by Akul Nishant Akhoury

 

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