RBI keeps key policy rate unchanged at 5.50%; revises GDP growth upwards to 6.8% for FY26

There is no further relief on EMIs as the Central Bank has kept the key (repo) rate unchanged at 5.50 per cent and exuded confidence on the economic growth during the second half of the current financial year.

The Monetary Policy Committee (MPC) met on the 29th, 30th of September and 1st October to deliberate and decide on the policy repo rate. After a detailed assessment of the evolving macroeconomic conditions and the outlook, the MPC decided unanimously to keep the policy repo rate unchanged at 5.50 per cent and to continue with the neutral stance.

The Central Bank has raised FY26 GDP growth estimates to 6.8% from 6.5% earlier, and also reduced FY26 CPI inflation forecast to 2.6% from 3.1% earlier.

The Committee observed that the overall inflation outlook has turned even more benign in the last few months, due to a sharp decline in food prices and the rationalisation of GST rates, the RBI Governor Sanjay Malhotra said while announcing the policy.

The average headline inflation for 2025-26 has been revised lower from 3.7 per cent projected in June and 3.1 per cent in August, to 2.6 per cent. Headline inflation for Q4 of 2025-26 and Q1 of next financial year (2026-27) too have been revised downwards and are broadly aligned with the target, despite unfavourable base effects.

According to RBI, the growth outlook remains resilient supported by domestic drivers, despite weak external demand. It is likely to get further support from a favourable monsoon, lower inflation, monetary easing and the salubrious impact of recent GST reforms.

“However, growth continues to be below our aspirations. Even though the growth projection for the current financial year is being revised upwards, the forward-looking projections for Q3 and beyond are expected to be slightly lower than projected earlier, primarily due to trade related headwinds, despite being partially offset by the impetus provided by the rationalisation of GST rates,” Malhotra observed.

On the use of Indian Rupee for International trade, the Bank has been making steady progress and proposed additional measures in this regard. The Bank said that it would permit Authorized Dealers (AD Banks) to lend in Indian Rupees to non-residents from Bhutan, Nepal and Sri Lanka for cross border trade transactions. Second, establish transparent reference rates for currencies of India’s major trading partners to facilitate INR based transactions; and lastly, permit wider use of Special Rupee Vostro Account (SRVA) balances by making them eligible for investment in corporate bonds and commercial papers.

On the External Sector, the RBI said India’s current account deficit moderated to USD 2.4 billion (0.2 per cent of GDP) in Q1 of current financial year as compared with USD 8.6 billion (0.9 per cent of GDP) in Q1 of last fiscal (2024-25) due to increased net services surplus and strong remittance receipts despite higher merchandise trade deficit. During July-August 2025, merchandise trade deficit continued to remain elevated. Notwithstanding rising global trade uncertainties, India’s services exports, driven by software and business services, witnessed robust growth in July-August 2025.

On the external financing side, net foreign direct investment (FDI) reached a 38-month high in July 2025, driven by increased gross foreign direct investment and a moderation in repatriation and outward foreign direct investment. However, net FPI recorded outflows of USD 3.9 billion in 2025-26 so far (April 01-September 29) due to outflows in both equity and debt segments. As on September 26, 2025, India’s foreign exchange reserves stood at USD 700.2 billion, sufficient to cover more than 11 months of merchandise imports.

Overall, India’s external sector continues to be resilient, Malhotra said adding “we remain confident of meeting our external obligations comfortably.”

He observed that the INR has witnessed some depreciation accompanied by phases of volatility. RBI is keeping a close watch on movements of the INR and will take appropriate steps, as warranted.

Commenting on the Policy, Srinivasan Vaidyanathan, Operating Partner, Essar Capital, said “Amidst a major demand push by reduction in the GST rates, the RBI has adopted a cautious approach of holding the repo rate at 5.5 percent. It will also help navigate the global uncertainties and choppy waters.  With low inflation and steady policies, corporates can plan their finances carefully and invest wisely. While this stance provides short-term stability, it highlights the necessity for more assertive policy measures to invigorate demand and investment, ensuring sustainable economic growth.”