YET ANOTHER PAUSE IN REPO RATE? IT’S A CLOSE CALL FOR MPC THIS TIME

The Reserve Bank of India’s monetary policy committee (MPC) is set to announce its policy decision on 1 October.

- ADITI NAYAR

While the expected sub-3% inflation for fiscal year 2026 (FY26) would typically have implied space for another rate cut, a status quo may be more opportune in light of the developments since the committee's last meeting in August.

Inflation has remained benign over the last two months. Headline Consumer Price Index (CPI) inflation had cooled to 1.6% in July from 2.1% in June, falling below the lower bound of the MPC'starget range of 4%+/-2% for the first time in eight years. It rebounded to 2.1% in August, while remaining subdued. The September reading is expected to dip to around 1.8%, taking the average for Q2 to 1.8% as well, trailing the MPC’s forecast of 2.1%.

A large part of the cooling in retail prices owing to the 22 September goods and services tax (GST) cut should be visible in the October data, which is likely to soften inflation to a series low of around 1.3%, In Icra’s assessment, the GST rejig could dampen headline CPI prints by 25-50 basis points (bps) during Q3 FY26 to Q2 FY27 relative to our pre-GST cut estimates. This will necessitate a paring of the MPC’s CPI inflation projections for FY26 in the October meeting from 3.1% indicated in August.