The Reserve Bank of India released the minutes of its Monetary Policy Committee meeting held between September 19 and October 1, 2025, where the panel unanimously decided to keep the repo rate unchanged at 5.5% for the second straight time, emphasizing caution due to global trade uncertainties like US tariffs, while lowering inflation forecasts and raising GDP growth estimates to support India's economic stability.
What is the Reserve Bank of India's Monetary Policy Committee (MPC) and how does it function?
Basic Structure: The MPC is a six-member body established under the RBI Act, 1934, amended in 2016, consisting of three RBI officials (Governor, Deputy Governor, and one executive director) and three external experts appointed by the government for four-year terms.
Role in Policy Making: It meets bimonthly to review economic data and set the repo rate, aiming to maintain inflation at 4% with a ±2% band while supporting growth; decisions are made by majority vote, with minutes released 14 days later for transparency.
Historical Context: Introduced to insulate monetary policy from political influence, the MPC replaced the earlier system where the RBI Governor had sole authority, aligning India with global best practices like the US Federal Reserve.
Decision Process: Meetings involve analyzing inflation, GDP growth, fiscal policies, and global factors; the neutral stance allows flexibility for rate changes without signaling tightening or easing.
What was the key decision in the RBI's October 2025 MPC meeting?
Repo Rate Status: The panel unanimously kept the repo rate—the rate at which RBI lends to banks—at 5.5%, following a jumbo 50 bps cut in June 2025 that brought it down from 6%.
Stance on Policy: With a 4:2 vote, the MPC retained a neutral stance, meaning it can adjust rates up or down based on data, unlike an accommodative stance that signals easing.
Rationale for Hold: Despite low inflation, the decision reflects caution over unresolved impacts from prior cuts and government measures, plus external risks like US tariffs affecting exports.
Additional Measures: RBI hiked gold loan limits to ₹2 lakh and introduced reforms for digital lending and UPI, aiming to boost credit access for small borrowers and enhance financial stability.
Why did the RBI decide to hold the repo rate instead of cutting it further?
Current Economic Conditions: Inflation is benign at 2.6% for FY26, creating policy space, but growth measures from recent fiscal announcements (like budget incentives) are still unfolding, making a cut premature.
Global Uncertainties: Evolving tariff policies from the US could impact India's exports, estimated to shave 40-60 bps off GDP, while global policy shifts add to the "foggy outlook" as noted by Governor Malhotra.
Transmission of Past Cuts: The cumulative 100 bps reductions in 2025 are still transmitting through the banking system, and adding more now risks ineffective stimulus amid high uncertainties.
Risk of Overdose: Members like Ram Singh warned that ultra-low inflation (below target) could harm businesses and public finances if rates are cut too soon, potentially leading to economic imbalances.
What are the revised economic projections from the RBI and what do they indicate?
GDP Growth Forecast: Raised to 6.8% for FY26 from 6.5%, driven by robust Q1 performance of 7.8%, signaling resilience in consumption and investment despite external headwinds.
Inflation Outlook: Lowered to 2.6% from 3.1%, reflecting easing food prices and core inflation, but with warnings of transitory low levels that could rise due to demand pressures.
Implications for Economy: Higher growth projection boosts confidence, but lower inflation suggests room for easing later; however, it highlights vulnerabilities in MSMEs and jobs from trade shocks.
Quarterly Breakdown: Q2 FY26 growth at 6.5%, Q3 at 7.0%, with inflation at 2.8% in Q2 and 2.4% in Q3, indicating a balanced but watchful approach.
What were the differing views among MPC members on the policy decision?
Governor Sanjay Malhotra's View: Acknowledged space for cuts but emphasized caution due to policy uncertainties and evolving developments, advocating data-dependent decisions.
Deputy Governor Poonam Gupta's Perspective: Noted potential for lowering rates but stressed waiting for full impact of government measures and global clarity to avoid depleting policy tools.
External Member Nagesh Kumar's Dissent: Voted for accommodative stance, citing sluggish private investment and external shocks like US tariffs that could disrupt growth trajectory.
Other Members' Insights: Saugata Bhattacharya saw no compelling reason for cuts amid moderating inflation, while Indranil Bhattacharyya viewed low inflation as temporary, focusing on medium-term demand.
What are the broader implications of this RBI decision for India's economy?
Impact on Borrowers and Lenders: Home and auto loan EMIs remain steady, supporting buyer sentiment during festive season, but delays potential relief for borrowers facing high rates.
Bond Market and Investments: Yields stayed stable at 6.57%, favoring accrual strategies; markets expect cuts in early 2026 if uncertainties ease, boosting bond attractiveness.
Sectoral Effects: MSMEs may face challenges from trade tensions, but reforms like higher gold loans (₹2 lakh) and digital lending guidelines enhance credit flow to underserved segments.
Global Context: Aligns with cautious policies worldwide, like Fed's stance, helping India navigate tariff wars while pursuing Viksit Bharat goals through balanced growth and inflation control.
What is the repo rate and why is it important in monetary policy?
Definition and Mechanism: Repo rate is the interest rate at which RBI provides short-term loans to commercial banks against government securities, influencing overall lending rates in the economy.
Role in Controlling Inflation and Growth: Lowering it boosts liquidity and encourages borrowing for growth; raising it curbs inflation by making loans costlier, as seen in RBI's inflation-targeting framework since 2016.
Transmission to Economy: Changes affect bank deposit/lending rates, EMIs, and investment; full transmission takes 6-12 months, explaining RBI's wait-and-watch approach.
Historical Trends: From 8% in 2014, it peaked at 6.5% pre-2025 cuts; current 5.5% reflects post-pandemic easing to support recovery.
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