The RBI Monetary Policy Committee (MPC) unanimously reduced the policy repo rate by 25 basis points from 6.5% to 6.25%. The MPC decided to continue with the neutral stance, maintaining an unambiguous focus on a durable alignment of inflation with the target while supporting growth.

The MPC observed that while growth is set to rebound from the Q2FY25 low, it remains well below last year’s level. Meanwhile, inflation is expected to further moderate, supported by a favourable outlook on food and the continued transmission of past monetary policy actions. Thus, growth-inflation dynamics open up policy space for the MPC to support growth. The Governor also highlighted flexibility within the Inflation Targeting Framework to respond to evolving growth-inflation dynamics.

The RBI projected CPI inflation at 4.2% YoY for FY26. The RBI expects food inflation pressure to ease significantly, owing to robust Kharif production, winter easing in vegetable prices and favourable prospects for the Rabi crop. However, core inflation is expected to rise, although it will remain moderate. Continued uncertainty in global financial markets, coupled with volatility in energy prices and adverse weather events, pose upside risks to the outlook.

The RBI projected FY26 GDP growth at 6.7% YoY. The RBI appears optimistic about the recovery in industrial activity and fixed investment. Tax relief in the Union Budget 2025-26 is also expected to benefit household consumption. However, headwinds from geopolitical tensions and protectionist trade policies pose downside risks to the outlook.

We anticipate further rate cuts of 50–75 basis points in this cycle. Additionally, we expect the RBI to keep liquidity near neutral through OMOs, FX swaps, or term variable rate repos as required.

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