Inflation down, GDP looking up, RBI holds repo rate at 5.5%

In a widely anticipated move, the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC), chaired by Governor Sanjay Malhotra, decided to keep the benchmark repo rate unchanged at 5.5% following its three-day meeting. This marks the continuation of a pause after a series of rate cuts earlier in the year, bringing the total reduction to 100 basis points from 6.5% at the start of 2025.
The MPC maintained its "neutral" stance on monetary policy, emphasizing a balanced approach to support economic growth while monitoring inflationary pressures. Governor Malhotra highlighted external risks, including potential U.S. tariffs that could dampen global growth and impact India indirectly.
On the growth front, the RBI revised its real GDP forecast for the fiscal year upward to 6.8% from the previous 6.5%, citing resilient domestic demand and better-than-expected performance in key sectors. This optimistic revision comes despite challenges like a widening fiscal deficit, which reached 38.1% of the annual target by August.
Inflation remains subdued, with headline CPI revised to 2.6% recently from 3.1% in August and 3.7% in June, well below the RBI's 4% target for the seventh straight month. Core inflation held steady at 4.2%, supporting the decision to hold rates. Recent GST rate cuts were also noted as contributing to the softer price environment.

Markets Positive

Market reactions were mixed but positive overall: The Indian rupee strengthened by 5 paise to 88.75 against the U.S. dollar in early trading, aided by RBI interventions to prevent it from hitting record lows. Government bonds rallied on hopes of a dovish signal, while equity markets showed modest gains.
Other key announcements included a 1.5% rise in external debt to $747.2 billion in the first quarter, though foreign exchange reserves cover over 93% of this, providing a buffer. Analysts expect the RBI to remain vigilant, with potential rate adjustments in future meetings depending on global developments and domestic data.
This decision reflects the MPC's strategy to nurture recovery while guarding against uncertainties, benefiting borrowers with stable EMIs but disappointing those hoping for further easing.