The Reserve Bank of India's Monetary Policy Committee (MPC) is set to hold the repo rate in its October policy review, aided by the demand pickup from GST reforms, better-than-expected Q1 FY26 GDP growth, and an inflation trajectory expected to inch higher over the coming months, says a report published on Thursday.
The report underlined the fact that inflation has remained under check, thanks mostly to GST rationalisation, and the FY26 average is now set at almost 2.6 per cent.
ICRA observed that the transmission of the previous 100 bps policy rate cut has been almost taken up in new deposits (-94 bps) whereas the impact has been significantly weaker on outstanding deposits (-18 bps). On the loan side, the Weighted Average Lending Rate decreased 60 bps for new loans from a 42-bps reduction for loans already in the books. The report further noted that additional softening of lending rates seems limited in the near future.
On the government bond market, the 10-year G-sec yield is likely to be in the 6.40–6.60 per cent range, and the yield curve will remain steep. This expectation is a result of over-liquidity holding down short-term rates and long-term yields under upward pressure due to fiscal risks and supply-demand conditions.
Internationally, the spread between 10Y India G-sec and 10Y US Treasury yield increased to 236 bps in September 2025 from 209 bps at the close of June 2025, after a US Fed rate cut," the report added.
The report further noted that the systemic liquidity surplus reduced in September 2025 after it had continued to remain high between June and August 2025 mainly on account of advance tax outflows.
"Internationally, the spread between the 10Y India G-sec and the 10Y US Treasury yield widened to 236 bps in September 2025 from 209 bps at the end of June 2025, following a US Fed rate cut," the report said.
As per the report, GST rationalisation is going to reduce headline CPI inflation by 25–50 bps over Q3 FY26 to Q2 FY27 relative to previous estimates.
"Average CPI inflation for FY2026 is now projected at around 2.6 per cent (against 3.0 per cent earlier)," the report noted.
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