The Reserve Bank of India’s October 2025 policy reinforced its cautious yet supportive stance. After cumulative cuts of 100 bps earlier in the year and subsequent pauses in June and August, the MPC once again kept the policy repo rate unchanged at 5.50%, with a neutral stance. While inflation has eased to multi-year lows aided by GST rationalisation and benign food prices, the RBI opted to wait for the full impact of earlier actions to transmit through the system.
Growth remains resilient, with Q1 FY26 GDP surprising at 7.8%, though external headwinds and tariff-related uncertainties continue to weigh on the outlook. The central bank signaled that policy space has opened up, but it will tread carefully, balancing the gains from disinflation with global and domestic risks.
TL; DR
- Repo rate unchanged at 5.50%, SDF at 5.25%, MSF/Bank Rate at 5.75%.
- Neutral stance retained, but two MPC members favoured a shift to accommodative.
- FY26 GDP growth projection revised up to 6.8% (Q1 actual at 7.8%, Q2 seen at 7.0%).
- FY26 CPI inflation forecast slashed to 2.6% (vs. 3.1% in August), Q4 seen higher at 4.0% due to base effects.
- Liquidity surplus persists; CRR cuts in Oct–Nov to further aid transmission.
- Additional package of 22 regulatory measures announced to strengthen banking, improve credit flow, ease forex rules, and internationalise INR.
Investment View
With policy easing behind us and inflation near trough levels, the scope for fresh duration gains is limited. The RBI’s focus is now on transmission, suggesting a pivot from rate-driven capital gains to accrual-driven income strategies. Investors should prioritise short-to-medium duration (2–4 yr) debt funds such as Banking & PSU, Corporate Bond, and floater fund. A barbell allocation (core accrual with a satellite exposure to 4–6 yr duration) can provide balance in case global risks or softer inflation open space for renewed easing.
Inflation Outlook: Benign for Now, Base Effects Ahead
CPI inflation dipped to an eight-year low of 1.6% in July 2025 before inching up to 2.1% in August, ending a nine-month streak of decline. The sharp disinflation was driven by deflation in vegetables, pulses, and cereals, alongside the impact of GST rate rationalisation. This prompted the RBI to further lower its FY26 inflation forecast to 2.6% (vs. 3.1% in August).
Looking ahead, inflation is expected to remain benign in H2, supported by healthy kharif sowing, strong reservoir levels, and adequate foodgrain buffers. However, large adverse base effects in Q4 and early FY27 are projected to push CPI inflation higher towards 4.0–4.5%. Core inflation remains at 4.2%, with non-food price pressures broadly in check.
| Period | Jun-25 | Aug-25 | Oct-25 |
| FY26 | 3.7% | 3.1% | 2.6% ⬇️ |
| Q2FY26 | 3.4% | 2.1% | 1.8% ⬇️ |
| Q3FY26 | 3.9% | 3.1% | 1.8% ⬇️ |
| Q4FY26 | 4.4% | 4.4% | 4.0% ⬇️ |
| Q1FY27 | — | 4.9% | 4.5% ⬇️ |
(Source: RBI, W Research)
Our View:
The October policy marks a phase of disinflationary comfort, with CPI now well below the target and food prices aided by supply-side gains and GST cuts. However, this phase is unlikely to last base effects that will drive inflation higher by late FY26, while demand-side pressures may resurface. We believe the RBI will stay cautious, allowing past easing to transmit fully before considering fresh moves. Further rate action, if any, would hinge on inflation sustaining below 4% into FY27.
Growth Outlook: Domestic Strength, Global Risks Persist
India’s real GDP surged by 7.8% in Q1 FY26, supported by robust private consumption, resilient rural demand, and steady investment activity. Manufacturing recovery and services momentum remain strong, while agriculture prospects have brightened on account of a good monsoon and kharif sowing progress.
However, external headwinds — tariff-related actions, trade policy uncertainty, and global financial volatility — continue to weigh on the outlook. The RBI revised its FY26 GDP forecast upward to 6.8% (from 6.5% earlier), though sequential moderation is expected through H2.
| Period | Jun-25 | Aug-25 | Oct-25 |
| FY26 | 6.5% | 6.5% | 6.8% ⬆️ |
| Q1FY26 | 6.5% | 6.5% | 7.8% ⬆️ |
| Q2FY26 | 6.7% | 6.7% | 7.0% ⬆️ |
| Q3FY26 | 6.5% | 6.6% | 6.4% ⬇️ |
| Q4FY26 | 6.3% | 6.3% | 6.2% ⬇️ |
| Q1FY27 | — | 6.6% | 6.4% ⬇️ |
(Source: RBI, W Research)
Our View:
The October policy highlights resilient domestic growth despite weak external demand. Upward revision to FY26 GDP reflects robust consumption, investment, and supportive policy reforms (including GST rationalisation). However, growth momentum is projected to cool in H2 due to tariffs and global risks. We believe India’s domestic demand cycle remains intact, but the upside is capped, making effective policy transmission and fiscal push critical for sustaining momentum.
Liquidity: Surplus Persists, Transmission Strengthening
- System liquidity continues in comfortable surplus, aided by RBI operations and strong FX reserves.
- Net LAF absorption averaged ₹2.1 lakh crore/day since the August policy.
- Upcoming 75 bps CRR cut (Oct–Nov) will release durable liquidity, boosting credit conditions.
- WACR has stayed below repo, anchoring short-end rates.
- Bank lending rates continue to ease: WALR on fresh rupee loans down ~58–71 bps since February.
- Deposit rates have softened further, with WADTDR down to over 100 bps YTD.
Our View:
Transmission is progressing steadily. Liquidity surplus and easing lending rates will support credit growth and smoothen borrowing costs. Short-duration and accrual-focused bond segments remain the primary beneficiaries.
Way Forward: Policy Pause with Space Opening
- The RBI’s October policy reiterates that the front-loaded easing pivot is complete; the focus now is on transmission and stability.
- Key watch points:
- Monitoring core inflation (steady ~4%) and food prices (benign but seasonal risks ahead).
- Tracking the pace of credit transmission and loan rate pass-through.
- Managing liquidity surplus from CRR cuts without destabilising money markets.
- Responding flexibly to tariff-related shocks, global oil prices, and geopolitical risks.
Our View: This remains a deliberate pause, not a policy reversal. With inflation at record lows, the RBI has policy space, but it prefers to wait for earlier easing and GST reforms to play through. Unless inflation remains durably below 4% or growth falters meaningfully, further rate cuts are unlikely in the near term.
Investment Strategy
| Scenario | Macro Backdrop | Strategy to Play | Preferred Categories |
| Base Case (Most Likely) | Inflation averages ~2.6% FY26, rising to 4% in Q4; GDP growth 6.8% with resilient domestic demand; RBI holds rates at 5.5% with neutral stance. | Focus on accrual-driven returns as rate-driven rally is behind us. | Short Duration, Banking & PSU, Corporate Bond funds (2–4 yr). |
| Bull Case (Soft Inflation Surprise) | CPI stays below 3% longer than expected; growth momentum holds; global risks ease. | Retain core accrual but add tactical long-duration bets to capture residual yield softening. | Dynamic Bond, Gilt (10Y), Medium-to-Long Duration funds. |
| Bear Case (Sticky Inflation & Global Shock) | CPI rises faster (above 4.5%+ by Q1 FY27); growth slows on tariffs/global volatility; yields back up. | Reduce duration risk, park in ultra-short & money market funds for safety and reinvestment flexibility. | Money Market, Liquid, Ultra-Short Duration funds. |
| Growth Upside (Domestic Boost) | Govt. capex + GST reforms fuel private investment; GDP closer to 7%+; inflation manageable near 4%. | Favor accrual debt for stability but also rotate into equities (domestic cyclicals & consumption). | Short Duration + Equity MFs (Flexi-cap, Domestic themes). |
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