Repo Rate review: likely to pause the rate, but change the stance

 Repo Rate Review Oct’ 25: 
Pause in rate, but change in stance likely

The bi-monthly review meeting of the Monetary Policy Committee (MPC) of Reserve Bank of India (RBI) is underway (Sep 29 to Oct 1, 2025) and the RBI Governor is expected to announce the decisions of MPC on 1st Oct’ 25.

I predict that the MPC may continue the  'pause' in the policy rate, but might change the stance from 'neutral' to 'accommodative'. 

Rationale: 
While

(i) inflation for August (2.07%, still at the lower end of the inflation target band), 
(ii) the GDP growth for Q1FY26 is impressive (7.8% against 6.4% in the corresponding period the previous year), 
(iii) the forex reserves crossed and remain at USD700 billion plus levels,
(iv) the reforms implemented in GST, with two slabs of 5% and 18%, promising increase in GDP on account of reduced price across consumer and capital goods, (inducing more production and more sales)

are positive factors, 

(a) the additional tariffs introduced by USA on Indian Goods exported to their country, 
(b) its effect on the Indian Rupee (from Rs.87 plus levels nearing Rs.89 in the past one month) and on the FPI outflows 

indicate that there is a marked uncertainty, not only in respect of sectors dependent on their exports to the US, but also on the allied/ancillary sectors, the fortunes of which, in turn, are determined by the fortunes of the Indian exporters to US. 

So, in my view, there will be more discussions, in the current MPC, on the uncertainty factors than the positive domestic factors and the one year cushion available from the forex reserves to meet approximately one year import requirements. Though the exports to US that are likely to be affected might be in the range of 0.5 to 1% of GDP, there is an indirect impact on the domestic GDP, considering that significant number of ancillary units, supplying raw materials to the exporters and  job workers undertaking part of the entire order/ executing part of the job, will also be affected in the process. 

Repo Rate: The transmission of reduction in repo rate by 100 bps (so far during the current financial year) to the borrowers is still on. It is expected to be faster during Q3, as the festive season is on and the banks, which got Rs.62000 cr.(app) (from the 25 bps reduction in CRR) in September (the first tranche of the 100 bps reduction in phases) are expected to get another Rs.185000 cr., during October and November. (due to the effect of 75 bps reduction in three phases, reducing the CRR requirement to 3.0%). It will therefore, be prudent for the MPC to continue the repo rate at the present level of 5.5% and leave it to RBI to encourage the banks to support the sectors affected by the additional tariffs imposed by the US on their goods reaching US. My prediction is MPC is likely to say 'no change' in the policy rate.

Stance: If the MPC decides to pause the repo rate, it needs to cool the market sentiments, simultaneously, with positive assurances that it is ready to support the growth, as and when the need arises, especially as the situation is still evolving on account of the additional tariffs on India by the US. On that score, I feel that there are good chances to change the stance from 'neutral' to 'accommodative'. 

MPC is also likely to review the inflation and growth forecasts, considering the cut in GST and the impact of US tariffs on growth. 

I also expect RBI to introduce a slew of measures, including interest subvention scheme to the affected exporters/deemed exporters and expand the definition of deemed exports.  It may also think of introducing refinance schemes at repo rate (through development financial institutions or on its own) to encourage the banks to lend and support the affected sectors.

Regards

V. Viswanathan
CGM Retd. e-SBT

29th September 2025

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