RBI’s October MPC: A Pause with Dovish Undertones

The Reserve Bank of India’s (RBI) October 2025 Monetary Policy Committee (MPC) meeting arrived at a delicate macroeconomic juncture, balancing a benign inflation outlook with emerging risks to growth. After cumulative rate cuts of 100 basis points earlier this year, the RBI once again held the policy repo rate at 5.50%, alongside the Standing Deposit Facility (SDF) at 5.25% and the Marginal Standing Facility (MSF) and Bank Rate at 5.75%. While this pause was expected, the accompanying tone and regulatory measures made it clear that the central bank has left the door open for further easing should conditions warrant.

Growth Picture: Strong Domestic Momentum, External Headwinds

India’s growth momentum remains robust. The first quarter of FY26 delivered a 7.8% GDP growth, comfortably above RBI’s earlier estimate of 6.5%. Consumption demand, resilient rural activity, manufacturing recovery, and healthy services sector dynamics have underpinned this strength

The central bank has accordingly revised its FY26 GDP projection upward to 6.8%, from 6.5% previously. However, this optimism is tempered by global and trade-related challenges. Tariff actions and policy uncertainty from the US, coupled with broader geopolitical and financial market volatility, continue to cast shadows on the external environment. Sequential moderation in growth is expected in the second half of FY26, as reflected in RBI’s estimates of 6.4–6.2% growth for Q3 and Q4.

Inflation: Comfort Today, Base Effects Ahead

If growth has been surprisingly strong, inflation has been a bigger positive story. Headline CPI averaged an eight-year low of 1.6% in July 2025, before inching up to 2.1% in August. The disinflationary phase has been driven by falling food prices—particularly vegetables, pulses, and cereals—along with the impact of GST rationalisation

Reflecting these trends, the RBI cut its FY26 inflation projection to 2.6%, sharply lower than its 3.1% forecast in August and the 4.2% projected back in February. While this has expanded policy space, the central bank has also warned of base effects: by Q4 FY26 and early FY27, headline inflation could climb back towards 4–4.5%. Core inflation remains stable at around 4.2%, indicating underlying demand pressures are contained for now.

Policy Choice: Dovish Pause over Premature Cut

Markets had speculated whether the MPC might front-load a small 25 bps rate cut to consolidate the disinflationary gains. However, that would have required careful forward guidance, potentially unsettling the bond market. Instead, the RBI opted for a dovish pause. Governor Shaktikanta Das stressed that “policy space for further supporting growth has opened up,” but prudence demanded waiting for the transmission of past easing to fully play out.

Two MPC members even voted for a shift towards an explicitly accommodative stance, underscoring the tilt of the discussion.

Regulatory Push: Beyond Rates

In addition to the monetary stance, the October policy unveiled a package of 22 regulatory measures aimed at strengthening the financial system. These include liberalising lending against securities, easing acquisition financing, enhancing credit availability to large borrowers, and measures to internationalise the rupee

Together, these steps are intended to accelerate credit transmission, improve banking flexibility, and ensure smoother financial intermediation at a time when growth risks are emerging from abroad.

Liquidity and Bond Market Dynamics

Liquidity remains in surplus, aided by RBI’s operations and strong FX reserves. A 75 bps CRR cut scheduled across October–November is expected to release durable liquidity into the system, boosting credit conditions. Lending rates have already eased, with weighted average lending rates on fresh loans down by 58–71 bps since February.

For the bond market, the policy outcome is a mixed signal. On one hand, short- to medium-term yields are expected to stay anchored by low inflation, easy liquidity, and predictable forward guidance. On the other, the government’s debt management strategy—lengthening the maturity profile of issuances (WAM rising to over 20 years in FY25)—along with fiscal constraints, is keeping the yield curve steep.

This suggests investors may find better opportunities in the 2–4 year segment, where both accrual and roll-down gains are more attractive than chasing duration at the long end.

Investment Implications

The current pause should be seen less as an end to easing and more as an intermission. If disinflation persists or growth risks materialise from tariff-related shocks, the RBI retains room to cut further. Conversely, if inflation trends upwards on account of base effects or global shocks, the central bank can afford to wait.

For investors, this evolving backdrop argues for a barbell strategy: a core allocation to short- and medium-duration funds (Banking & PSU, Corporate Bond, Floater), complemented by tactical exposure to slightly longer maturities in case global risks reprice yields lower. Those with investment horizons beyond two years can also consider income plus arbitrage funds, while investors with shorter horizons may find corporate bond or short-duration funds better aligned.

Conclusion

The October MPC outcome encapsulates the RBI’s balancing act: acknowledging favourable inflation dynamics while remaining alert to growth risks and global uncertainties. By pausing, but striking a dovish tone and backing it up with structural regulatory reforms, the central bank has signalled that the easing cycle is not over—it is simply in a wait-and-watch mode.

For markets and investors, this means preparing for a lower-for-longer interest rate environment, with opportunities in accrual-driven strategies, while staying nimble to shifts in the growth–inflation balance.

Market this week

Source: BSE and NSE

• Equity markets staged a recovery in the truncated week, reversing part of the prior week’s declines.
• Buying interest was broad-based across sectors, supported by the RBI’s policy outcome, which aligned with expectations.
• The central bank’s upward revision to GDP growth and reduction in inflation forecasts further bolstered sentiment.
• Favourable monsoon conditions, steady domestic institutional inflows, and optimism over Q2FY26 earnings guidance also underpinned the rally.
• All sectoral indices ended higher; Nifty PSU Bank surged over 4%, Metals gained 4%, and Private Banks advanced 2.5%.
• Defence and Oil & Gas indices also added 2–2.3% during the week.
• On the flows front, FIIs extended their selling streak for the twelfth straight week, offloading equities worth ₹8,347.25 crore.
• Domestic institutions remained consistent buyers for the 24th week in a row, purchasing equities worth ₹13,013.40 crore.

Weekly Leaderboard

Source: BSE

Stocks that made the news this week:

Automobile stocks witnessed profit-booking on October 3 after recent rallies, with major names like TVS Motor, M&M, Bajaj Auto, Hero MotoCorp, Maruti Suzuki, Eicher Motors and Ashok Leyland slipping up to 2 percent. This came despite robust September sales data supported by GST rate cuts and festive demand. Maruti Suzuki reported a 9.1 percent rise in domestic wholesales and strong bookings growth, while Tata Motors overtook M&M and Hyundai to become the second-largest player in the domestic passenger vehicle market. Hyundai and M&M also posted healthy year-on-year sales growth, though M&M’s wholesales were constrained by logistics challenges.

Goldman Sachs turned constructive on India’s aerospace and defence sector, highlighting the government’s plan to nearly double defence exports to ₹50,000 crore by FY29 from ₹23,600 crore last year. The brokerage prefers private players over PSUs, naming Solar Industries, Bharat Electronics, Data Patterns and PTC Industries as top picks, while rating Bharat Dynamics a ‘Sell’. Reflecting investor optimism, the Nifty Defence index has surged nearly 23 percent in CY25 so far, far outperforming the Nifty 50’s 5 percent gain.

Hindalco Industries scaled a new high of ₹782 on the BSE, buoyed by a strong business outlook and sustained earnings momentum after a record FY25. For Q1FY26, consolidated EBITDA rose 9 percent year-on-year to ₹8,673 crore, while net profit jumped 30 percent to ₹4,004 crore. The performance was led by robust results from the India business and resilience in Novelis, which benefited from an 8 percent rise in beverage can shipments despite global headwinds.