The RBI MPC in its October 2025 meeting kept the repo rate unchanged at 5.50 per cent and maintained a neutral stance, citing easing inflation and resilient domestic growth.
Inflation
The governor mentioned that the inflation outlook has become more benign due to a sharp decline in food prices and GST rate rationalization, leading to a downward revision of average headline inflation.
Growth
Despite global uncertainties, India’s economic activity has remained resilient, with real GDP growth surprising on the upside at 7.8% for Q1. The MPC revised GDP growth estimates upwards citing factors such as an above-normal monsoon and buoyancy in the services sector, with risks remaining evenly balanced.
Guidance
The MPC is waiting for policy actions like the GST rate rationalization and the impact of the current global uncertainties to play out before taking a decision to cut rates.
Two members of the MPC, Professor Ram Singh and Dr. Nagesh Kumar, favored an accommodative stance for forward guidance, while others maintained a neutral stance.
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Liquidity
System liquidity, as measured by the net position under the Liquidity Adjustment Facility, showed an average daily surplus of 2.1 lakh crore rupees since the last MPC meeting. In response to a 100-basis-point cut in the policy repo rate, the weighted average lending rate of scheduled commercial banks for fresh rupee loans moderated by 58 basis points, indicating a broad-based monetary policy transmission.
Additional Measures
The governor announced additional measures aimed at strengthening the banking sector, improving credit flow, and promoting ease of doing business. Key proposals include making the Expected Credit Loss (ECL) framework effective from April 1, 2027, introducing risk-based deposit insurance premiums, and expanding the scope of capital market lending by banks by increasing limits for lending against shares and for IPO financing.
On the external front, the governor acknowledged that higher US tariffs could not be fully offset by GST rate cuts. Consequently, the MPC has revised downwards its GDP growth forecast for the second half of FY26, even as domestic demand remains supportive.
Debt strategy
Given the neutral stance and expectations of a delayed but eventual rate-cutting cycle, we prefer income plus arbitrage, which gives lower volatility and tax efficiency. Investors may consider gradually extending duration to capture potential mark-to-market gains, though they may need to be tactical. Loans may continue to be paid down as asset prices are still elevated.
Equity Strategy
Equities remain richly valued across segments, with small and mid-caps trading at stretched multiples. We therefore prefer large caps, which offer better valuation, comfort, and earnings visibility. The recent corrections in domestic markets, driven by global uncertainties, have also provided a more attractive entry point into quality large-cap names. Be prepared for ongoing global volatility from currency markets, geopolitics, and weakening US data, though.
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