Booster cut ahead? RBI sees policy space as inflation projections drop to 2.5 per cent

Mumbai: The Reserve Bank of India’s Monetary Policy Committee (MPC) is widely expected to slash policy rates by 25 basis points (bps) in its upcoming announcement on Wednesday, according to a report by Union Bank of India. The anticipated move, described as a “booster cut,” is being attributed to a sharp decline in inflation, which has opened up policy space for the central bank.

The report stated, “Our baseline view is of a 25 bps repo rate cut in this meeting. The view is premised on another round of sharp downward revision in inflation projection for FY26.” Estimates now peg inflation closer to 2.5 per cent, with a downward bias, factoring in the nearly 60 bps impact of the Goods and Services Tax (GST) on prices beginning October 2025.

With markets divided on whether the MPC will opt for a cut or maintain the status quo, analysts said the RBI’s communication will be as critical as the decision itself. According to the report, a dovish pause could prove more effective in transmitting relief to the bond market and lending rates than a hawkish cut.

The Union Bank report also drew parallels with the US Federal Reserve’s earlier risk management cut, noting that the RBI’s move, if implemented, would primarily serve as a sentiment booster for markets. It further suggested that the easing cycle is difficult to time, but projected at least one more 25 bps reduction before December 2025.

The RBI’s three-day MPC meeting began in Mumbai on Monday, where committee members are deliberating on policy conditions before finalising their decision. RBI Governor Sanjay Malhotra will announce the outcome at 10 AM on Wednesday, October 1.

With inputs from ANI