What to expect from October 2025 RBI Monetary Policy?

27 Sep 2025 , 10:16 AM

CONTEXT OF THE OCTOBER 2025 RBI POLICY?

In the previous policy statement in August, the theme was about tariffs, and the impact that Trump’s penal tariffs would have on Indian industry. Since then, a lot has happened, although the trade relations between India and the US still remain frigid. With Trump now proposing 100% tariffs on pharmaceutical imports, it will only make things tougher for Indian exporters. So, the context for the October policy will be two-fold.

The first context will be India’s Plan-B to tackle the tariff problem. On the one hand, trade talks with the US are still on, but the US is unlikely to relent on Russian oil purchases. That is something, India also would not want to give up. Hence, focus will be more on what fiscal and monetary can do to boost growth. The second context will be the RBI game-plan if Fed undertakes a series of rate cuts. For the RBI, it will be a delicate balance between boosting growth and defending the value of the Rupee, already near ₹89/$.

RECAP OF KEY ANNOUNCEMENTS OF AUG-25 MONETARY POLICY

Here are key highlights of the August 2025 policy statement.

• RBI MPC held status quo on repo rates at 5.50% to allow time the transmission to sink in. Hence, SDF and bank rate also remained the same.
• The FY26 GDP growth estimate was held at 6.5%, since the RBI was unsure of the likely impact of the penal tariffs imposed by the US.
• The August policy cut CPI inflation estimate for FY26 by another 60 bps to 3.1%; taking the total inflation downgrade to 170 bps since February 2025.
• The stance of the monetary policy was maintained at Neutral; which is in sync with the CRR cuts of 100 bps becoming effective between October and November.

Let us turn to the key expectations from October 2025 monetary policy.

• WILL RBI CUT 25 BPS OR HOLD STATUS QUO IN OCTOBER 2025?

The dominant view is that the RBI may hold status quo on rates at 5.5% in October. The 3-day MPC meeting starts on 29-Sep and will culminate in the presentation of the monetary policy on 01-Oct. With inflation averaging below 2% in the last 3 months, there is good reason for the RBI to cut rates. However, with broad macro concerns still around, the RBI may want to reserve more of its policy arsenal for a rainy day. The current policy rate is just 35 bps above the pre-COVID rates, so the RBI does not have much room. Also, rate cuts would weaken the rupee. The USDINR touched a low of ₹88.81/$ this week and is inching closer to ₹89/$. Status quo on rates looks the safest and most prudent option for RBI.

• WILL RBI CHANGE ITS FY26 REAL GDP GROWTH ESTIMATES

In the June and the August policy, RBI held the real GDP growth estimate for FY26 at 6.5%. To be fair, the RBI does have a reason to upgrade the GDP growth estimate. Q1FY26 GDP growth came in at a robust 7.8%, largely driven by the services sector. The service sector buoyancy is expected to continue for the remaining quarters also. However, there is pressure likely from higher tariffs, which has already started impacting export units and the solvency of MSMEs. In addition, the Kharif output this year is likely to grow slower due to the late deluge, which caused substantial damage to crops. Also, with the base effect for inflation fading, real growth will be at a disadvantage. The most likely scenario is that the RBI will hold real GDP estimate at 6.5% for FY26.

• WILL FY26 INFLATION ESTIMATES BE LOWERED FROM 3.1%?

That is possibly the one area where a shift is likely. To put things in context, RBI has cut FY26 inflation estimates by 170 bps from 4.8% to 3.1% between February and August 2025. The average CPI inflation in the last 3 months is around 2%. However, there are 3 risks to inflation. Firstly, the base effect advantage of the last few months is likely to wane and that should push inflation higher. Secondly, Kharif output may be lower than originally estimated due to late rains. That could spike food inflation. Also, tariffs are likely to raise import costs; and that could translate into imported inflation. In these conditions, the RBI may at best cut inflation estimates for FY26 by about 10 bps to 3.0%, just to give a message to the markets. RBI would be wary of multi-dimensional inflation risks.

The 3-day MPC meeting commencing on 29-Sep is likely to see intense debate on inflation and rates trajectory. However, there could be a lot more focus on managing liquidity, especially since the financial system has shifted from surplus to deficit in recent months. Ensuring adequate liquidity may be the bigger concern for the RBI at the current juncture!