The Reserve Bank of India (RBI) kept its key repo rate steady at 5.50% on Wednesday but indicated room for additional policy easing in the coming months, citing weaker growth prospects and subdued inflation.

The Monetary Policy Committee (MPC) maintained its cautious stance, noting it was “prudent to wait for the impact of policy actions to play out” after 100 basis points of cuts earlier this year. However, economists highlighted that the central bank’s commentary leaves the door open for a renewed easing cycle.

RBI Governor Sanjay Malhotra flagged global headwinds, including punitive US tariffs, as key risks that could dampen momentum. The RBI expects GDP growth to slow from 7% in Q3 2025 to 6.2% by Q1 2026, underscoring the need for policy support.

Soft inflation trends also provide space for accommodative action. Consumer prices rose just 2.1% in August, well below the 4% target, and the RBI has cut its FY25/26 inflation forecast from 3.1% to 2.6%. While base effects may nudge prices higher, favourable weather conditions are expected to keep food inflation in check, pointing to a gradual recovery in headline inflation.

“Current macroeconomic conditions and the outlook has opened up policy space for further supporting growth,” the central bank noted in its policy statement.

In a unanimous decision, the six-member MPC committee led by the RBI governor kept the repo rate unchanged for the second consecutive time as the “impact of the front-loaded monetary policy actions and the recent fiscal measures is still playing out”. It also maintained the stance at neutral even as two members favoured changing it to ‘accommodative’.

“The MPC considered it prudent to wait for the impact of policy actions to play out and greater clarity to emerge before charting the next course of action,” said Malhotra. 

While the MPC would have been tempted to go for an interest rate cut with inflation printing low, the 50% US tariffs and global headwinds made the panel take a cautious approach. The outlook on growth stayed positive, led by domestic drivers including the recent GST reforms, a favourable monsoon and lower inflation. In the first quarter of FY26, real GDP growth rose to a five-quarter high of 7.8%.

Analysts at Capital Economics believe further rate cuts are likely. “We remain comfortable with our view that another 50 basis points of cuts lie in store, taking the repo rate down to 5% by early next year,” said Shilan Shah, Deputy Chief Emerging Markets Economist.

GDP forecast revised

The RBI revised upwards its GDP growth forecast for FY26 to 6.8% from 6.5% earlier. The growth estimate for the quarter ended September has been upgraded to 7% from 6.7%. 

However, the growth projection for the fiscal third-quarter ended December has been lowered to 6.4% from 6.6% and the exit quarter of FY26 to 6.2% from 6.3%. 

The growth outlook remained resilient, Malhotra said, but cautioned that external trade headwinds, tariffs, prolonged geopolitical tensions and volatility in international financial markets posed challenges. The risks to growth are “evenly balanced”.

“The implementation of several growth-inducing structural reforms, including streamlining of GST are expected to offset some of the adverse effects of the external headwinds,” the governor stated.

Inflation revised downwards 

The RBI has sharply lowered the inflation projection for FY26 to 2.6% from 3.1% estimated in August and 3.7% in June.

The benign outlook on inflation has been driven by the GST rate cuts, a favourable monsoon and sharp decline in food prices. This has triggered the MPC to further lower down inflation rates.

The consumer price index-based (CPI) inflation is now projected at 1.8% in both Q2 and Q3 of FY26, from the earlier estimate of 2.1% in July-September quarter of 2025 and 3.1% in October-December. For the exit quarter of FY26, the forecast now is 4% from 4.4% earlier, while for Q1 of FY27 it has been revised down to 4.5% from 4.9%.

“The recently implemented GST rate rationalisation would lead to a reduction in prices of several items in the CPI basket. Overall, the inflation outcome is likely to be softer than what was projected in August, primarily on account of the GST cuts and benign food prices,” said Malhotra. 

Economists feel the RBI has left the door open for future rate cuts. Says Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank, “Growth risks from tariff uncertainties have created room for additional rate cuts if needed. We see scope for 25-50 basis points of easing in the rest of FY26.”

The RBI’s cautious pause, combined with its dovish outlook, suggests that monetary policy will remain supportive of growth as the economy navigates slowing momentum and external risks.