If you are a borrower, then your interest rates are likely to remain steady as we head into the Diwali festive period. The monetary policy committee of the RBI on Wednesday unanimously voted to keep the policy repo rate on hold at 5.5 per cent, while also maintaining the stance at “neutral.”
The MPC has so far in 2025 slashed the benchmark rate at which Reserve Bank of India lends money to commercial banks by 100 basis points (1 per cent). By leaving the repo rate unchanged, the EMIs of existing borrowers will remain stable. Moreover, RBI Governor Sanjay Malhotra pointed that adequate liquidity in the system, and the remaining CRR (cash reserve ratio) cuts it had announced earlier should further facilitate monetary policy transmission.
He stated that the weighted average lending rate of scheduled commercial banks had moderated by 58 basis points for fresh rupee loans and declined 55 bps for outstanding rupee loans. Meanwhile, the weighted average domestic term deposit rate on fresh deposits declined by 106 bps, while that on outstanding deposits softened 22 bps.
Why did MPC choose to keep repo rate on hold?
Malhotra acknowledged that inflation outlook had turned even more benign, at the same time warned that tariff-related uncertainties could decelerate growth in the second half of the year. Still, the central bank lowered its inflation forecast for the full year, while at the same time raising the GDP growth forecast.
If there are no worries on inflation and while there are ongoing external headwinds, why then did the MPC choose to keep the repo rate on hold and not cut it further?
“The MPC noted that the impact of the front-loaded monetary policy actions and the recent fiscal measures is still playing out. The trade related uncertainties are also unfolding. The MPC, therefore, considered it prudent to wait for the impact of policy actions to play out and greater clarity to emerge before charting the next course of action,” pointed RBI Governor Sanjay Malhotra.
Over the last few months, inflation has softened considerably, although unusually heavy rains and floods in many states over the last few weeks could likely pose some upward pressure on food inflation looking ahead. But, the base effect is also in play. CPI (consumer price index) inflation in August rose to 2.07 per cent from 1.61 per cent in July, still significantly lower than the RBI’s targeted 4 per cent and near to the lower-end of the 2-6 per cent band.
In this backdrop, the RBI has reduced its inflation forecast for the current financial year ending March 2026 to 2.6 per cent, compared to 3.1 per cent it had projected in August.
CPI inflation is now seen at 1.8 per cent in the second as well as third quarter and then rising to 4.0 per cent in the January-March quarter and further 4.5 per cent in the April-June quarter of next year.
“The rationalisation of the Goods and Services Tax (GST) rates is likely to have a sobering impact on inflation while stimulating consumption and growth,” said Malhotra.
He also noted that the progress of the south west monsoon had been satisfactory and that healthy kharif sowing, adequate reservoir levels and comfortable buffer stocks of foodgrains should keep food prices benign.
It has also “brightened prospects” of agriculture and rural demand, said Malhotra. Buoyancy in services sector coupled with steady employment conditions are supportive of demand, which is expected to get a further boost from the rationalisation of GST, he added. At the same time, ongoing tariff and trade policy uncertainties will impact external demand, he stated.
GDP growth forecast
Even as he flagged external headwinds, the GDP growth forecast for the full year 2025-26 has been raised to 6.8 per cent from 6.5 per cent, given the growth surprising on the upside at 7.8 per cent in the April-June quarter.
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“Prolonged geopolitical tensions and volatility in international financial markets caused by risk-off sentiments of investors pose downside risks to the growth outlook. The implementation of several growth-inducing structural reforms, including streamlining of GST are expected to offset some of the adverse effects of the external headwinds,” said Malhotra.
GDP growth in the second quarter is expected at 7.0 per cent, falling further to 6.4 per cent in the third quarter, and 6.2 per cent in the fourth quarter, before rising a bit to 6.4 per cent in the first quarter of next financial year.
The RBI governor also pointed that bank credit growth, despite being lower than last year, continued to remain “healthy,” another reason why the MPC may have decided to keep the repo rate on hold this time.