MPC maintains key interest rate; country poised for growth amid resilience

On 1 October 2025, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) announced its Monetary Policy Statement, opting to maintain the key interest rate, the Repo Rate.

The MPC unanimously decided to maintain the key policy rate, also known as the repo rate, at 5.50 percent.

Consequently, the Bank Rate and Marginal Standing Facility will remain at 5.75 percent, while the Standing Deposit Facility (SDF) rate will be adjusted to 5.25 percent.

This decision aims to support growth while achieving a medium-term CPI inflation objective of 4 percent with a +/- 2 percent band. The MPC continues to maintain a neutral policy position.

MPC on Gross Domestic Product (GDP) estimates

The global economy in 2025 has displayed resilience with robust growth in the US and China, despite uncertainties stemming from policy changes. Inflation exceeding targets in some advanced economies poses challenges for central banks. Financial markets exhibit volatility, with the US dollar strengthening and treasury yields rising, while equities remain strong in both advanced and emerging markets.

The first quarter of 2025-26 saw strong economic performance, with real GDP growing at 7.8 percent, driven by private consumption and fixed investment. Gross value added (GVA) also increased by 7.6 percent, led by manufacturing and services.

High-frequency indicators indicate resilience in economic activity, particularly in rural demand due to favourable monsoon conditions and robust agricultural activity.

Urban demand is gradually recovering, and government revenue expenditure has shown robust growth.

The current positive outlook for agriculture and rural demand is attributed to an above-normal monsoon and progress in kharif sowing. Supportive factors such as buoyancy in the services sector and stable employment conditions are also noted.

However, uncertainties in tariff and trade policies, geopolitical tensions, and international financial market volatility pose risks to growth.

The implementation of growth-inducing structural reforms is expected to mitigate some adverse effects, with real GDP growth projected at 6.8 percent for 2025-26, with balanced risks.

MPC on inflation

Headline CPI inflation decreased to 1.6 percent in July 2025 before rising to 2.1 percent in August, primarily due to a decline in food inflation. Fuel group inflation remained stable, while core inflation was contained at 4.2 percent in August.

The inflation outlook for the second half of 2025-26 is expected to be softer than projected, driven by factors such as the south-west monsoon, higher kharif sowing, and GST rate cuts.

However, large base effects may exert upward pressure on inflation in Q4, with CPI inflation for 2025-26 now projected at 2.6 percent.

MPC stance

The MPC noted an improved inflation outlook, with headline inflation revised lower for 2025-26. Despite weak external demand, the growth outlook remains resilient due to domestic drivers and other factors.

However, growth projections for Q3 and beyond may be slightly lower due to tariff-related developments and global uncertainties.

The MPC acknowledged the existence of policy space to further support growth but will await the impact of current policy actions before making further decisions.

 The MPC unanimously decided to maintain the policy repo rate at 5.5 percent and uphold its neutral stance, with two members suggesting a more accommodating position.

Additional measures

1. Strengthening the resilience and competitiveness of the banking sector:

• The Expected Credit Loss (ECL) framework of provisioning with prudential floors will apply to all Scheduled Commercial Banks and All India Financial Institutions from April 1, 2027.
• A glide path until March 31, 2031 will allow banks to adjust to higher provisioning levels.
• Revised Basel III capital adequacy norms will be effective for commercial banks from the same date.
• Measures are being taken to align guidelines with international standards and enhance the capital adequacy framework.
• A draft circular on Forms of Business and Prudential Regulation for Investments has been finalised, removing regulatory restrictions on business overlap.
• Risk-based deposit insurance premiums are proposed to incentivise sound risk management by banks.

2. Promoting Ease of Doing Business:

• Proposals include consolidating circulars and directions for regulated entities and providing greater flexibility to banks for opening and maintaining transaction accounts of borrowers.
• Measures are proposed to strengthen the export sector, including extending time periods for repatriation from foreign currency accounts and simplifying the reconciliation process for outstanding entries related to exports and imports.

3. Internationalising the Indian Rupee:

• Measures to further promote the use of the Indian Rupee in international trade include allowing banks to lend in Indian Rupees to non-residents from Bhutan, Nepal and Sri Lanka.
• Establishing transparent reference rates for major trading partner currencies and expanding the use of SRVA balances for investment in corporate bonds and commercial papers.

Conclusion

Despite external challenges, the Indian economy is poised for high growth, supported by decreasing inflation. The MPC’s cautious monetary policy approach aims to balance price stability and growth support.

The RBI’s focus on managing inflation is evident, with the current policy stance maintaining the repo rate at its current level. The RBI’s commitment to clear communication and credible actions underscores its dedication to fostering economic stability and growth.

India’s pursuit of Viksit Bharat through collaborative fiscal, monetary, regulatory and public policies signifies a comprehensive approach to sustainable development.

The recent simplification of the GST rate structure is a positive step, and the MPC’s vigilant stance reflects a commitment to navigating economic challenges effectively.