Monetary Policy Review - October 2026

The Monetary Policy Committee (MPC) unanimously decided to raise the policy repo rate by 25 bps to 5.5%. The Committee also changed the monetary policy stance from ‘neutral’ to ‘calibrated tightening’. Notably, two external members were against the stance change and voted in favour the retention of Neutral stance.

The Governor noted that the sudden re-escalation 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. However, he stressed on the fact that despite heightened external uncertainty, India’s growth has been resilient and momentum remains strong. However, he warned that inflation faces continued pressure from supply side factors such as deficient southwest monsoon and volatility in international crude oil prices. Importantly, he highlighted that the demand side inflationary pressure remained benign.

On Growth: The RBI noted that though global growth has remained resilient, it faces significant downside risk due to continued West Asia conflict, tightening global financial conditions and high sovereign public debt, especially in Advance Economies. For India, the RBI highlighted that growth has remained resilient as evidenced form Q1FY27 GDP growth and continued momentum in Q2. Going forward, it noted that while domestic growth faces near term headwind from external uncertainty and supply side pressures, continued momentum in services sector, strong capacity utilisation and robust credit flows can help sustain growth momentum. Taking all this into consideration, GDP growth for FY27 has been revised up by 40bps to 7.1% (from 6.7% in the previous policy) while GDP growth for Q1FY28 has been revised down by 20bps to 7.1%, with risks evenly balanced.

On Inflation: The RBI indicated that though the recent uptick in inflation was primarily driven by food and fuel groups, there is some evidence of broadening price pressures reflecting in inch up of core inflation and rise in diffusion index. Going forward, it highlighted that inflation could inch higher driven by several supply side disruptions such as deficient southwest monsoon, ongoing El Nino conditions, higher commodity prices and rise in input prices. Thus, FY27 CPI inflation was revised upwards to 5.2% (from 5.0% earlier). Estimate of core inflation (excluding food and fuel) for FY27 was also revised up to 4.4% (from 4.3% earlier). CPI inflation for Q1FY28 is now projected at 5.6% (from 5.3% earlier), with risks evenly balanced.

Conclusion and Outlook

The decision of MPC to hike policy repo rate by 25bps was on expected lines although the change in stance from neutral’ to ‘calibrated tightening’ might have come as a negative surprise as a large section of the markets expected no change in stance. Thus, today’s decision by RBI was perceived as hawkish and yields reacted negatively immediately after the announcement. However, it recovered most of the losses as day progressed, as the Governor clarified in the press conference that calibrated tightening is milder form of tightening and rate decisions will remain data dependent. Further, the absence of liquidity measures such as OMOs or CRR adjustments also aided the market sentiments.

Today’s MPC was held in the backdrop of challenging global environment, volatile crude prices, elevated global yields, strong domestic growth momentum and rising inflation risks globally. While the change in monetary policy stance was perceived as hawkish, we believe stance change reflects the direction of the policy rate and not necessarily the magnitude. Hence, in our view, it was done to retain policy flexibility to react to evolving global / geopolitical events and not necessarily implies an aggressive rate hike cycle.

Apart from the above, there are several factors which should help contain the upward pressure on the yields from hereon. Risk of fiscal slippage remains low, despite global uncertainties due to robust direct tax and expectation of disinvestment receipts exceeding budget estimates. Further, Balance of Payments (BoP) remains well positioned due to manageable current account deficit (CAD) and large inflows under FCNR(B) deposits which should support INR stability.

Since the August 2026 policy, the Indian 10-year benchmark yield has already risen by approximately 50 bps, effectively pricing in a significant portion of RBI’s tightening as well as higher US yields. With the spread between the 1-year OIS and the 10-year G sec now near the long-term average of ~100 bps, a substantial amount of negative information is already reflected in valuations. Accordingly, we do not expect sustained sell-off from the current levels and remain constructive from a medium to long term perspective. Our view is subject to two key risks: crude oil prices remaining elevated for an extended period and US sovereign yields rising further from current levels.

In view of the above and given the substantial liquidity influx driven by FCNR(B) flows is likely to support selective segments, particularly corporate bonds. Investors may consider allocating to high‑quality corporate bonds focused funds with the duration of 2‑ to 4‑year segment from a medium‑term perspective. Further, given the elevated absolute yield levels at the longer end of the G-sec curve, one may also consider a staggered increase in exposure to long-duration funds in line with individual risk appetite.

DISCLAIMER

The views of HDFC Asset Management Company Limited, Investment Manager for HDFC Mutual Fund expressed herein as of October 01, 2025 are based on internal data, publicly available information and other sources believed to be reliable. The source for this document is the Bi-monthly Monetary Policy Statement, dated October 01, 2025 published by the RBI. Any calculations made are approximations, meant as guidelines only, which you must confirm before relying on them. The information contained in this document is for general purposes only and is not investment advice. The document is given in summary form and does not purport to be complete. The document does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. The information/ data herein alone are not sufficient and should not be used for the development or implementation of an investment strategy. The statements contained herein are based on our current views and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Past performance may or may not be sustained in future. HDFC Mutual Fund/HDFC AMC is not guaranteeing/ offering/communicating any indicative yields or guaranteed returns on investments made in the scheme(s). Neither HDFC AMC and HDFC Mutual Fund (the Fund) nor any person connected with them, accept any liability arising from the use of this document. The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice.

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