RBI MPC (October 2026)

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RBI MPC (October 2026) Review

Our View

The October MPC marks a clear reversal in the RBI’s policy cycle, with the first repo rate hike since February 2023 and a shift from neutral to calibrated tightening. Compared with August, the growth-inflation equation has turned less favourable, with FY27 GDP growth upgraded to 7.1% from 6.7% on the back of a stronger-than-expected 7.8% Q1FY27 print, while FY27 CPI inflation has been raised to 5.2% from 5.0%. The stronger growth outlook, also in line with the World Bank’s 7.1% FY27 growth forecast, gives the RBI sufficient cushion to tighten policy without materially hurting activity. More importantly, inflation pressures are no longer confined to food and fuel, with core inflation rising to 4.2%, inflation above 4% spreading to around 37% of the CPI basket and the RBI flagging elevated inflation expectations and early signs of generalisation. The external backdrop has also become less supportive, with the renewed West Asia conflict driving crude volatility, while the US Fed’s 25 bps hike in September and tightening by other major central banks have pushed global rates and bond yields higher. This matters for India through the narrower India-US rate differential, pressure on the rupee and the risk of imported inflation, particularly when the energy import bill is already elevated. The BOJ’s tightening adds another layer to the global liquidity backdrop by reducing the availability of low-cost yen funding and raising the risk of broader carry-trade unwinding. Against this backdrop, we view the RBI’s hike as pre-emptive policy normalisation rather than an attempt to curb demand, aimed at anchoring inflation expectations before supply-side pressures become embedded in pricing behaviour. The unanimous rate hike shows broad agreement that the easing cycle has ended, while the 4-2 split on the stance indicates that the MPC remains cautious about the extent of further tightening. With rate cuts off the table in the near term, further hikes remain possible, but the RBI has deliberately retained flexibility to pause, making the path ahead dependent on crude prices, core inflation, inflation expectations and second-round effects.

Valuation and Outlook

Inflation

Headline CPI inflation rose to 4.8% in August 2026 from 4.5% in July, with the increase primarily driven by food and fuel prices. However, food inflation has become more broad-based, while core inflation also increased to 4.2%. Core inflation excluding precious metals stood at 2.9%, and the share of CPI items recording inflation above 4% rose to around 37%, pointing to a gradual broadening of price pressures.
Inflation Outlook: The near-term inflation outlook remains challenging, with deficient monsoon conditions, ongoing El Niño and elevated energy and commodity prices likely to keep supply-side pressures elevated. The FY27 CPI inflation forecast has been revised upwards to 5.2% from 5.0%, with inflation projected to rise to 6.0% in Q3FY27 before moderating to 5.7% in Q4FY27. While the RBI sees limited evidence of supply-side pressures getting embedded in pricing behaviour, elevated inflation expectations and the broadening of price pressures warrant close monitoring of second-round effects .

Growth

Domestic activity remains broad-based, with Q1FY27 real GDP growth at 7.8%, supported by strong private consumption, fixed investment and exports. Manufacturing growth remained robust, while services activity strengthened further on the back of buoyant domestic and external demand. In Q2, high-frequency indicators for July-August point to sustained domestic momentum, with merchandise exports recording double-digit growth.
Growth Outlook: The RBI has raised its FY27 GDP growth forecast to 7.1% from 6.7%, supported by strong capacity utilisation, robust credit flows and the government’s infrastructure push. Services exports are expected to remain buoyant, while bilateral trade agreements should support merchandise exports. Rural demand remains a key monitorable given the deficient monsoon and El Niño conditions, although healthy foodgrain buffers and government interventions should provide some mitigation. Overall, growth risks remain evenly balanced, with stable employment and resilient domestic demand providing support despite elevated global uncertainty .

Key concall Highlights

Key Concall Highlights

The MPC unanimously decided to increase the policy repo rate by 25 bps to 5.50%, while changing its policy stance from neutral to calibrated tightening. The decision reflects the RBI’s assessment that inflation pressures have broadened and the inflation outlook is no longer as benign as in the previous year.
Consequently, the standing deposit facility (SDF) rate under the liquidity adjustment facility (LAF) stands at 5.25%, while the marginal standing facility (MSF) rate and the Bank Rate have been raised to 5.75%.
The RBI stated that the Indian economy remains resilient despite persistent global headwinds, with Q1FY27 real GDP growth at 7.8%, supported by strong private consumption, fixed investment, merchandise exports and services exports. However, renewed West Asia tensions, volatile crude oil prices, tighter global financial conditions and an uneven monsoon under El Niño continue to pose risks to the outlook.
The RBI revised its FY27 real GDP growth forecast upwards to 7.1% from 6.7%, with quarterly projections of 7.2% (Q2), 6.9% (Q3) and 6.8% (Q4). The stronger outlook reflects resilient domestic demand, sustained services momentum, robust credit flows, infrastructure spending and improving merchandise exports. Real GDP growth for Q1FY28 is projected at 7.1%, with risks assessed as evenly balanced.
Headline CPI inflation increased to 4.8% in August 2026 from 4.5% in July, driven primarily by higher food and fuel inflation. However, core inflation also increased to 4.2%, while core inflation excluding precious metals rose to 2.9%. The share of headline CPI items recording inflation above 4% increased to around 37%, indicating a gradual broadening of price pressures.
The RBI revised its FY27 CPI inflation forecast upwards to 5.2% from 5.0%, with quarterly estimates of 4.9% (Q2), 6.0% (Q3) and 5.7% (Q4), while Q1FY28 inflation is projected at 5.6%. Core inflation is projected at 4.4% for FY27. The RBI expects inflation to remain elevated amid deficient monsoon conditions, El Niño and high energy and commodity prices, with headline CPI expected to average nearly 5.8% over the next three quarters.