RBI TO CUT RATES ONLY IF GROWTH RISKS MATERIALIZE

The Reserve Bank of India’s (RBI) October policy was a close call with growing clamour for easing of policy rates as India’s growth outlook has become more uncertain.

- GAURA SENGUPTA

India’s real GDP growth outlook is caught between the tailwinds of the GST rate cuts and the headwinds of the US's steep tariffs. Meanwhile, inflation remains subdued, led by deceleration in food inflation.

Despite the heightened uncertainty on India’s growth, RBI on Wednesday maintained status quo on policy rates and retained its neutral stance. The key change was in the messaging, with RBI governor Sanjay Malhotra indicating space to ease policy rates due to significant moderation in inflation.

This policy flexibility is in sharp contrast to the June policy, when RBI had indicated that the bar for further rate cuts was high. The change in assessment is driven by a more benign inflation outlook due to a favourable monsoon. The GST rate cuts also added to the comfort on headline inflation.

The inflation factor

RBI lowered its inflation estimate for 2025-26 to 2.6% from 3.1%, and for the first quarter of FY27 to 4.5% from 4.9%.

That said, its outlook on inflation’s quarterly trajectory wasn’t as benign, with inflation expected to climb to 5.1% in the third quarter of FY27. The central bank projected full-year FY27 inflation at 4.5%.