India's RBI holds repo rate at 5.50%, FY26 GDP growth seen at 6.8%

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has voted unanimously to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 5.50 per cent. Consequently, the standing deposit facility (SDF) rate remains at 5.25 per cent while the marginal standing facility (MSF) rate and the Bank Rate remains at 5.75 per cent.

The MPC, under the chairmanship of Sanjay Malhotra, governor, RBI, also decided to continue with the neutral stance, after a detailed assessment of the evolving macroeconomic and financial developments and the outlook.

In India, real gross domestic product (GDP), driven by strong private consumption and fixed investment, recorded a robust growth of 7.8 per cent in the first quarter (Q1) of FY26. On the supply side, growth in gross value added (GVA) at 7.6 per cent was led by a revival in manufacturing and steady expansion in services.

Looking ahead, rising capacity utilisation, conducive financial conditions, and improving domestic demand should continue to facilitate fixed investment. However, ongoing tariff and trade policy uncertainties will impact external demand for goods and services.

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. Taking all these factors into account, real GDP growth for FY26 is now projected at 6.8 per cent, with Q2 at 7 per cent, Q3 at 6.4 per cent, and Q4 at 6.2 per cent. Real GDP growth for Q1 FY27 is projected at 6.4 per cent.

Headline CPI inflation declined to its eight-year low of 1.6 per cent year on year (YoY) in July 2025 before rising to 2.1 per cent in August – its first increase after nine months. Core inflation remained largely contained at 4.2 per cent in August.

“The recently implemented GST rate rationalisation would lead to a reduction in prices of several items in the CPI basket. Overall, the inflation outcome is likely to be softer than what was projected in the August MPC resolution, primarily on account of the GST rate cuts and benign food prices,” RBI said.

Despite the anticipation of moderate momentum during H2, large unfavourable base effects are likely to exert upward pressure on headline CPI inflation, especially in Q4. Considering all these factors, CPI inflation for FY26 is now projected at 2.6 per cent with Q2 at 1.8 per cent; Q3 at 1.8 per cent; and Q4 at 4 per cent. CPI inflation for Q1 of FY27 is projected at 4.5 per cent.

The average headline inflation for FY26 is now revised lower from 3.7 per cent and 3.1 per cent projected in June and August policy, respectively, to 2.6 per cent. Headline inflation for Q4 FY26 and Q1 FY27 too have been revised downwards and are broadly aligned with the target, despite unfavourable base effects. Core inflation for this year and Q1 FY27 is also expected to remain contained.

Though the growth projection for the financial year FY26 is being revised upwards, the forward-looking projections for Q3 and beyond are expected to be slightly lower than projected earlier, primarily due to tariff-related developments, despite being partially offset by the impetus provided by the rationalisation of GST rates.

The current macroeconomic conditions and the outlook has opened up policy space for further supporting growth. However, 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 global economy has been more resilient than anticipated in 2025, with robust growth in the US and China. The outlook, however, remains clouded amidst elevated policy uncertainty.

ALCHEMPro News Desk (HU)