Monetary Policy Committee Decisions and Economic Outlook · 2026-2027/1266

October 07, 2026

Governor’s Statement, October 7, 2026

Good morning and Namaskar. My greetings to all and best wishes for the forthcoming festive season.

2. The sudden reescalation of the West Asia conflict in September and the consequent hardening and volatility in global crude prices soured global economic sentiments and heightened financial market volatility. Although global growth remains resilient, it is projected to decelerate in 2026 from the previous year. Driven by escalating energy costs and rising food prices, global inflation is projected to increase sharply prompting monetary policy tightening by major central banks. Lingering trade uncertainty, rising bond yields in advanced economies and an appreciating dollar are keeping global financial market sentiments nervous and fragile. Further tightening of global financial conditions, uncertainty about fair valuation of AI stocks, and an elusive resolution of the West Asia conflict pose significant downside risks to the global economic outlook.

Decisions of the Monetary Policy Committee

3. In this global backdrop, the Monetary Policy Committee (MPC) met on 5th, 6th and 7th of this month to deliberate and decide on the policy repo rate. After a detailed assessment of the evolving macroeconomic and financial developments and the outlook, the MPC voted unanimously to increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 bps to 5.50 per cent. Consequently, the standing deposit facility (SDF) rate stands adjusted at 5.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 5.75 per cent. The MPC also decided to change the stance to calibrated tightening.

4. I shall now briefly set out the rationale for these decisions.

5. The MPC noted that the global context on account of geopolitical developments remains challenging. Nonetheless, the Indian economy has been strong, and the economic momentum remains broad-based. Moreover, the economy is expected to remain resilient.

6. It further observed that in light of available data, it is clear that inflation and its outlook are not benign as they were last year, with headline CPI inflation expected to average almost 5.8 per cent in the next three quarters and core inflation projected at 4.4 per cent this financial year. In this milieu, recalibrating the policy rate is imperative.

ᮧेस ᮧकाशनी PRESS RELEASE

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7. As regards supply side inflation, the MPC noted that monetary policy primarily acts by curtailing second round effects (inflation expectations and firm level pricing behaviour, etc.), which take time to manifest and are difficult to extract from available data. Apart from data related to inflation expectations and firm level pricing behaviour, indicators of generalisation of inflation like core inflation and diffusion indices are used for this purpose. It may, however, be kept in mind that it is difficult to distinguish between the second-round effects and the indirect impact of supply side pressures (in production cost through energy and other inputs) as both are present in these indicators. While there is some evidence of elevated inflation expectations and generalisation of inflation, there are limited signs of supply side pressures getting embedded in pricing behaviour.

8. Similarly, while there is limited evidence of demand side pressures, risks in view of strong growth in monetary and credit aggregates exist.

9. Considering all these factors, the MPC unanimously voted to increase the policy repo rate by 25 basis points to 5.50 per cent. The MPC also decided to change the stance to calibrated tightening. It underscored that given the current conditions, rate cuts are off the table in the near term and policy action ahead can only be a rate hike or a pause, depending on the evolving conditions and the outlook. The duration and extent of the rate hike cycle would be contingent on the actual growth-inflation developments and outlook, especially that of underlying inflation, the extent of broadening of price pressures and second round effects of the supply shock, as also the impact of demand impulses.

Assessment of Growth and Inflation

Growth

10. Domestic economic activity exhibited resilience amidst global headwinds as evident from real GDP growth of 7.8 per cent in Q1:2026-27. Growth was driven by resilient private consumption and strong investment activity while contribution of net exports also remained positive.

11. High frequency indicators available so far suggest that economic activity is holding momentum in Q2, albeit with some moderation compared to the preceding quarter. Despite deficient and uneven southwest monsoon,^1 kharif sowing, although somewhat above its normal level,^2 has been marginally lower than last year. Manufacturing activity, despite cost pressures, is holding well, as indicated by IIP and PMI.^3 Services sector activity remained steady and broad-based, owing to buoyant domestic and external demand.^4 Both manufacturing PMI and services PMI remained in expansionary zone in Q2:2026-27, although the pace of expansion slowed from Q1.^5 Private consumption remained broadly resilient in Q2, with continued support from discretionary spending.^6 Fixed investment remained strong as evident from several related indicators.^7 Some weakness is, however, observed in segments such as non-durable goods and domestic air passenger traffic.^8 With focus on expanding market access and diversification, merchandise exports registered higher double-digit growth during July-August 2026. Services exports also recorded an accelerated growth during July-August 2026.^9

12. Looking ahead, global economic uncertainty and supply chain disruptions are expected to have some bearing on domestic economic activity. Furthermore, weak southwest monsoon along with strong El Niño conditions may impact the upcoming rabi season and rural demand. The likely resilient non-farm activity, however, will continue to support rural consumption. Sustained momentum in services, and broadly stable employment conditions are expected to sustain urban demand. The Government’s continued thrust on infrastructure spending, rebound in private capex and strong credit flows are expected to bolster investment activity. While services exports are expected to remain buoyant, the recently operationalised bilateral trade agreements should support merchandise exports. Global headwinds from protracted geopolitical tensions, elevated international commodity prices, additional frictions in global trade and tightening of global financial conditions may weigh on growth outlook. Taking all these factors into consideration, real GDP growth for 2026-27 is projected at 7.1 per cent; Q2 at 7.2 per cent; Q3 at 6.9 per cent; and Q4 at 6.8 per cent. The upward revision in growth forecast by 40 bps further underscores the strength of economic activity despite significant headwinds. Real GDP growth for Q1:2027-28 is projected at 7.1 per cent. The risks are evenly balanced.

Inflation

13. CPI inflation increased to 4.8 per cent in August 2026 from 4.5 per cent in July. This was largely driven by higher inflation in food^10 and fuel^11 components. Food price increases have become more broad-based along with notable spikes in certain items such as sugar^12 and onion^13. Fuel inflation inched up in August, mostly due to unfavourable base effects. Core^14 inflation also increased to 4.2 per cent in August after remaining unchanged at 3.9 per cent for three consecutive months. Core inflation, excluding precious metals, increased to 2.9 per cent in August. Broadening of prices pressures was visible in the diffusion indices as the weighted share of items recording inflation above 4 per cent increased to about 37 per cent in August 2026.^15

14. The near-term outlook on inflation points towards continued pressures from supply side, on account of the deficient Southwest monsoon^16, El Nino conditions and high volatility in international oil prices^17. Price pressures are increasingly becoming visible across a range of commodities within the food component, apart from oil.^18 In addition, early signs of inflation becoming generalised are also evident from the increase in core inflation and higher inflation across a larger segment of the CPI basket.

15. Considering all factors, CPI inflation for 2026-27 is projected to be 5.2 per cent with Q2 at 4.9 per cent; Q3 at 6.0 per cent; and Q4 at 5.7 per cent. Inflation for Q1:2027-28 is projected at 5.6 per cent with risks being evenly balanced. Core inflation is projected at 4.4 per cent for 2026-27.