Monetary Policy - Newspaper Summary

 The sources provide a detailed snapshot of India's macroeconomic environment and monetary policy decisions made by the Reserve Bank of India's Monetary Policy Committee (RBI MPC) in October 2025, set against the backdrop of significant fiscal reforms and mounting global trade uncertainties.

I. Monetary Policy Decisions and Rationale (RBI MPC)

The RBI MPC decided to maintain a status quo on the policy repo rate, keeping it unchanged at 5.5 per cent. This decision to hold rates was unanimous among the six members. However, the decision to continue with the neutral monetary policy stance was carried by a majority vote of 4-2, with two members voting for an accommodative stance.

The MPC's pause was largely viewed as a pragmatic decision and a cautious stance. The key rationale included:

1. Inflation Moderation: The pause occurred amid generally benign inflation conditions. However, the MPC noted that the moderation in inflation was significantly helped by tumble in food prices, which are considered notoriously fickle.
2. External Risks: The MPC chose to "keep the powder dry" due to the likelihood of risks to growth emanating from prolonged geopolitical tensions, tariff-related developments (specifically US tariffs), and volatility in global financial markets.
3. Policy Lag: The committee deemed it prudent to wait for the impact of previously implemented monetary policy actions (a cumulative 100 bps cut since February 2025, including a 50 bps cut in June 2025) and recent fiscal measures (like GST reforms) to fully play out before charting the next course of action.
4. Future Action: The current macroeconomic outlook has opened up policy space for further supporting growth. Given the benign tone of the policy announcement, analysts believe another 25 basis points rate cut either in December 2025 or February 2026 cannot be ruled out. The pause arms the MPC with "dry powder" to act quickly should global risks materialize, such as capital outflows caused by a potential sovereign debt crisis or an AI-linked bubble in advanced economies.

II. Macroeconomic Outlook for FY26

The RBI Governor, Sanjay Malhotra, observed that the growth outlook remained resilient, supported by domestic drivers despite weak external demand.

The RBI made significant revisions to its projections for FY26:

Indicator	Previous Projection (August)	Revised Projection (October)	Change
GDP Growth (FY26)	6.5 per cent	6.8 per cent	Up by 30 bps
Retail Inflation (FY26)	3.1 per cent	2.6 per cent	Cut by 50 bps

This upward revision in the annual GDP forecast was primarily mandated by factoring in the stronger-than-anticipated 7.8 per cent GDP print for Q1 FY26. However, the RBI expects growth to decelerate in the second half of FY26. Projected quarterly growth rates moderate significantly: 7% in Q2, 6.4% in Q3, and 6.2% by Q4 FY26.

Growth is expected to receive further support from a favourable monsoon, lower inflation, monetary easing, and the impact of the recent GST reforms. Nonetheless, growth remains below the RBI’s aspirations.

III. RBI Regulatory Measures in the Economic Landscape

Beyond the rate decision, the "bigger action" of the policy announcement lay in a host of measures announced to boost bank credit growth and provide operational flexibility. These changes are integral to improving India's financial ecosystem and deepening capital markets:

1. Enhancing Capital Market Access:

   • The RBI enhanced the limit for bank lending against shares to ₹1 crore (up from ₹20 lakh per investor).
   • The limit for IPO financing by banks was increased from ₹10 lakh to ₹25 lakh per person.
   • The regulatory ceiling on lending against listed debt securities is also proposed to be removed altogether.
   • These moves are aimed at deepening the market, allowing retail investors to make larger bids, and driving investors toward the formal market to curb grey market investments.

2. Corporate Lending and M&A Financing:

   • The RBI announced plans to put in place an enabling framework for banks to finance domestic acquisitions by Indian corporates. Previously, banks were restricted to supporting only overseas acquisitions. This expansion of banks’ lending scope will deepen their role in capital market activities.
   • The RBI also proposed to withdraw the framework introduced in 2016 that disincentivized lending by banks to specified large borrowers (with credit limits of ₹10,000 crore and above). This withdrawal is growth-accretive and could boost corporate banking, potentially releasing substantial credit flow towards corporate demands.

3. Banking Sector Resilience:

   • The RBI announced the implementation of the Expected Credit Loss (ECL) based provisioning framework for banks, effective from April 1, 2027. This change, moving away from the incurred loss approach, is intended to improve bank resilience.
   • The RBI also proposed reducing the risk weights applicable to lending by NBFCs for operational, high-quality infrastructure projects to cut financing costs.

4. Rupee Internationalization:

   • The RBI notified an amendment allowing non-residents to invest in dated Government Securities/treasury bills and non-convertible debentures/bonds and commercial papers issued by Indian companies through their specified rupee accounts. Experts believe this move will enhance the attraction of Indian debt securities and aid in the internationalization of the rupee, helping to reduce dollar demand and control the exchange rate in the long run.

IV. Broader Economic and Regulatory Context (Fiscal and Trade)

The monetary policy decisions operate alongside major fiscal and external pressures characterizing India's economic landscape in October 2025:

• Impact of GST Reforms: Sweeping rate reductions in the Goods and Services Tax (GST), effective September 22, aimed to boost consumption, which accounts for about three-fifths of India's economic output. The recalibration of GST rates, along with a cut in personal income tax, has resulted in ample liquidity in the economy. September GST collections (reflecting August transactions) rose 9% year-on-year to ₹1.89 trillion, signaling robust demand. However, the rate reductions (e.g., elimination of 12% and 28% slabs, moving essential medicines to zero rate, and cutting cement tax) are expected to pose revenue challenges for the exchequer this year and likely next year.
• Geopolitical and Trade Headwinds: A primary concern is the tension with the US regarding tariffs. The RBI has warned that US tariff hikes could disrupt supply chains and hinder disinflation. The logjam in India-US tariff talks stretches on. If the 50 per cent reciprocal US tariff on goods or the threatened tariff on services exports becomes permanent, India could experience serious second-order effects on its employment, consumption and growth from Q3 FY26. This external pressure is creating a sense of urgency for the government to expedite policy flexibilities for Special Economic Zone (SEZ) units, allowing them to sell more easily in the domestic market to counter the effects of the US tariffs.
• Investment and Infrastructure: The government is actively mulling a proposal for a ₹20,000 crore risk guarantee fund to encourage private investment in infrastructure, a sector deemed critical for achieving high sustained growth. India is estimated to need substantial infrastructure spending—about ₹390 lakh crore by 2030—to realize the vision of a $5 trillion economy.
• Talent and Outsourcing Shifts: Global uncertainties and US trade policies are impacting the job market. The Indian IT sector is experiencing subdued growth with a muted outlook for FY26, though AI is projected to drive recovery in FY27. Rising anti-immigration sentiment and sharply increased H-1B filing fees in the US ($100,000 per foreign tech worker) have cut overseas opportunities and domestically, IT firms are scaling back hiring volumes. The sources also highlight concerns over "illegal layoffs" in the IT/ITeS sector by companies like TCS prioritizing profit.