Monetary Policy Report - October 2025

Published under Section 45ZM of the Reserve Bank of India Act, 1934 Monetary Policy Report OCTOBER 2025 Reserve Bank of India MumbaiContents Chapter I: Macroeconomic Outlook 1 I.1: Key Developments since the April 2025 MPR 1 I.2: The Outlook for Inflation 6 I.3: Growth Outlook 9 I.4: Balance of Risks 12 I.5: Conclusion 15 Box I.1: The Effect of Credit Conditions on Monetary Policy 9 Chapter II: Prices and Costs 16 II.1: Introduction 16 II.2: Developments across Major Components of the CPI 17 II.3: Decoding the Inflation Dynamics 26 II.4: Drivers of Inflation Trajectory 28 II.5: Conclusion 33 Box: II.1: Sharp Rise and Slow Fade: Nature of Food Inflation Cycles in India 18 Chapter III: Demand and Output 34 III.1: Aggregate Demand 34 III.2: Aggregate Supply 47 III.3: Conclusion 55 Box III.1: Consumer Confidence Channel: The Perception Pathway in Policy Transmission to Private Consumption 36 Box III.2: External Demand and Fixed Investment Dynamics: An Empirical Investigation with Firm-level Data 39 Chapter IV: Liquidity Conditions and Financial Markets 56 IV.1: Liquidity Conditions and the Operating Procedure of Monetary Policy 56 IV.2: Domestic Financial Markets 61 IV.3: Transmission to Lending and Deposit Rates 81 IV.4: Conclusion 86 Box IV.1: Review of the Extant Liquidity Management Framework – Major Recommendations 57 Box IV.2: Impact of Monetary Policy Surprises on Financial Conditions 61 Chapter V: External Environment 87 V.1: Global Economic Conditions 87 V.2: Commodity Prices and Inflation 91 V.3: Monetary Policy Stance 94 V.4: Global Financial Markets 97 V.5: Conclusion 102 Box V.1: Pass-through of US Treasury Yields to Emerging Market Bond Yields 100 iABBREVIATIONS AEs - Advanced Economies GDP - Gross Domestic Product ASEAN - Association of Southeast Asian Nations GoI - Government of India BE - Budget Estimates G-sec - Government Securities BIS - Bank for International Settlements GST - Goods and Services Tax bps - Basis points GVA - Gross Value Added BSE - Bombay Stock Exchange H1 - First Half of the Financial Year (April- September) CAG - Comptroller and Auditor General H2 - Second Half of the Financial Year CASA - Current Account and Savings Account (October-March) CDs - Certificates of Deposit ICR - Interest Coverage Ratio CGA - Controller General of Accounts IIP - Index of Industrial Production CI - Confidence Interval IMF - International Monetary Fund CiC - Currency in Circulation INR - Indian Rupee CII - Confederation of Indian Industry IPO - Initial Public Offering COVID - Corona Virus Disease IT - Information Technology CPI - Consumer Price Index LAF - Liquidity Adjustment Facility CPs - Commercial Papers LPG - Liquefied Petroleum Gas CRR - Cash Reserve Ratio MCLR - Marginal Cost of Funds-based Lending DCA - Department of Consumer Affairs Rate DGCI&S - Directorate General of Commercial m-o-m - Month-on-Month Intelligence and Statistics MPC - Monetary Policy Committee DII - Domestic Institutional Investor MPR - Monetary Policy Report EBLR - External Benchmark-based Lending Rate MSCI - Morgan Stanley Capital International ECI - Eight Core Industries MSF - Marginal Standing Facility EM - Emerging Market MSME - Micro, Small and Medium Enterprises EMEs - Emerging Market Economies EPFO - Employees’ Provident Fund NBFCs - Non-Banking Financial Companies Organisation NCAER - National Council of Applied Economic EWMA - Exponential Weighted Moving Average Research FCI - Financial Conditions Index NDTL - Net Demand and Time Liabilities FDI - Foreign Direct Investment NIMs - Net Interest Margins FI - Financial Institution NSDL - National Securities Depository Limited FPI - Foreign Portfolio Investment/Investor NSO - National Statistics Office GARCH - Generalized Autoregressive Conditional OECD - Organisation for Economic Cooperation Heteroskedasticity and Development iiiiiiMonetary Policy Report October 2025 OIS - Overnight Indexed Swap SAE - Second Advance Estimates OMOs - Open Market Operations SCBs - Scheduled Commercial Banks OPEC - Organization of the Petroleum SDF - Standing Deposit Facility Exporting Countries SIP - Systematic Investment Plan PCE - Personal Consumption Expenditure SLR - Statutory Liquidity Ratio PFCE - Private Final Consumption Expenditure SPD - Standalone Primary Dealers PMI - Purchasing Managers’ Index T-bill - Treasury Bill POL - Petroleum, Oil and Lubricants TMA - Tractor and Mechanization Association PP - Peak-to-peak TOP - Tomato, Onion and Potato PSBs - Public Sector Banks TT - Trough-to-trough PSUs - Public Sector Undertakings UK - United Kingdom PVBs - Private Sector Banks US - United States of America Q1 - First Quarter US$ - US Dollar Q2 - Second Quarter UT - Union Territory Q3 - Third Quarter VAR - Vector Autoregression Q4 - Fourth Quarter VRR - Variable Rate Repo q-o-q - Quarter-on-Quarter VRRR - Variable Rate Reverse Repo QPM - Quarterly Projection Model WACR - Weighted Average Call Rate RBI - Reserve Bank of India WADTDRs - Weighted Average Domestic Term RECO - Revenue Expenditure to Capital Outlay Deposit Rates REER - Real Effective Exchange Rate WALRs - Weighted Average Lending Rates RHS - Right Hand Side WMA - Ways and Means Advances S&P - Standard & Poor’s WPI - Wholesale Price Index SAAR - Seasonally Adjusted Annualised Rate y-o-y - Year-on-Year iivvChapter I Macroeconomic Outlook I. Macroeconomic Outlook Amidst heightened trade uncertainties, India’s economic outlook remains resilient, aided by improved consumption, investment demand and strong macroeconomic fundamentals. GST 2.0 reforms are expected to further boost domestic demand. Inflation is expected to gradually pick up from Q4:2025-26 on unfavourable base effect, despite the moderating impact of GST rationalisation. Against the backdrop of volatile global financial markets, elevated tariff-related risks, and continued geopolitical strife, monetary policy remains focussed on maintaining price stability and sustained economic growth. I.1 Key Developments since the April 2025 MPR continued to exert pressure. In September 2025, US financial markets displayed risk on sentiment with Since the release of the Monetary Policy Report (MPR) equity markets rallying amidst US Federal Reserve in April 2025, global economic growth has remained (Fed) rate cut and strong performance by technology steady, but still below its historical average.1 Trade companies. Bond yields softened and the dollar tensions, aggravated by tariff measures, along with weakened in the first half of September following the geopolitical tensions continued to weigh on the global Fed’s rate cut; however, these trends reversed after outlook. Headline inflation has moderated in several the release of stronger-than-expected economic data. economies. However, it still remains above target in most jurisdictions, even as core inflation pressures Global commodity prices generally softened due to eased. As a result, monetary policy pathways continue weakening demand and improved supply conditions, to diverge across countries. Several central banks although volatility persisted across segments. moved cautiously into an easing cycle, although Industrial metal prices fell sharply in April 2025 lingering inflation pressures necessitated a guarded on account of demand concerns but firmed up approach. In contrast, some central banks have in subsequent months. Agricultural prices eased adopted a more accommodative stance to counter overall, mainly led by cereals, even as vegetable oils their slowing growth and rising unemployment. increased on account of tighter supplies and stronger demand. Brent crude prices remained volatile, with Financial market volatility persisted, with global a downward bias during this period, in response to equities retreating in April 2025 amidst tariff-related shifting demand conditions and supply outlook. uncertainties. Since then, markets have rebounded and reached new highs. Sovereign bond yields in Turning to the domestic economy, India’s credit rating major advanced economies (AEs) have hardened since was recently upgraded to BBB+ (Stable) by Rating and April 2025, reflecting investor concerns over fiscal Investment Information, Inc. (R&I), Japan, and to BBB risks. At the same time, gold prices continued their (Stable) by Standard and Poor's (S&P) Global Ratings, upward trajectory as demand strengthened for safe- reflecting confidence in the country’s strong domestic haven assets, underscoring persistent uncertainty. demand, fiscal discipline, and external stability. The United States (US) Dollar Index fell about 11 per Real gross domestic product (GDP) expanded by 7.8 cent from January 2025 till end of June, witnessing its per cent in Q1:2025-26, the fastest pace in seven steepest fall in over a decade. With modest rebound in quarters. Growth was driven by strong private and the subsequent months, the index stabilised, though government consumption and buoyant gross fixed concerns over fiscal risks and expectation of rate cuts capital formation. On the supply side, real gross 1 The estimates and projections in the October 2025 MPR are based on statistical information available till September 26, 2025, which may not reflect the latest available data in all cases. 11Monetary Policy Report October 2025 value added (GVA) rose by 7.6 per cent, driven by a 9 potential revisions to the tolerance band of +/- 2 per per cent expansion in services, and robust growth in cent, and whether to maintain a specific target level manufacturing. Agriculture and allied activities also or only a range for inflation. improved with a 3.7 per cent increase. Monetary Policy Committee Meetings: April 2025 – Headline Consumer Price Index (CPI) inflation eased September 2025 to 3.2 per cent in April 2025, from 4.7 per cent in The MPC met in April 2025 amidst heightened global H2:2024-25, aided by favourable base effects and uncertainties from trade tariff measures which falling food prices. It moderated further to 1.6 per impeded global growth and inflation prospects. The cent in July 2025, the lowest reading in eight years, dollar index declined sharply and equity sell-offs as food inflation turned negative in June and July became broad-based especially in emerging markets. 2025. Even in August, inflation remained benign at On the domestic front, sustained rural demand, 2.1 per cent driven down by deflation in vegetables higher government capital expenditure, and healthy and pulses. Core inflation (i.e., CPI excluding food balance sheet of corporates and banks supported and fuel), however, largely remained steady around growth and the investment outlook, although the 4 per cent. headwinds from global trade disruptions posed The Monetary Policy Committee (MPC) continued downside risks. Consequently, the real GDP growth its easing cycle, initiated in February 2025, with a projection for 2025-26 was revised downwards by 20 25 basis points (bps) cut in April 2025, followed by bps to 6.5 per cent. Headline CPI inflation declined a frontloaded cut of 50 bps in June 2025, bringing by 160 bps during January-February 2025, reaching the repo rate down to 5.5 per cent. The stance of a 21-month low of 3.8 per cent in February 2025 on policy was shifted to accommodative in April from account of falling food prices. The outlook for food neutral in February but reverted to neutral in June inflation improved with a broad-based seasonal indicating the limited policy space for further easing. correction in vegetable prices. It was expected In addition, the RBI announced a phased 100 bps to soften further, aided by robust kharif arrivals reduction in the cash reserve ratio (CRR) in four and record wheat production, despite risks from tranches starting September 2025 to ease liquidity global market uncertainties and adverse weather. conditions. At its August meeting, the MPC kept the Consequently, the CPI inflation projection for 2025- repo rate unchanged at 5.5 per cent while retaining 26 was revised downwards to 4 per cent. The MPC the neutral stance, reaffirming its commitment to noted that there was greater confidence in the aligning inflation with the target while supporting durable alignment of headline inflation with the growth. target, but growth still remained on a recovery path. Accordingly, the MPC unanimously voted to reduce On the brink of the next review of the monetary the policy repo rate by 25 bps to 6.0 per cent and policy framework due in March 20262, the Reserve change the stance from neutral to accommodative to Bank has issued a discussion paper on August 21, continue supporting growth. 2025, inviting public comments on four key aspects – the choice between headline and core inflation, the At the time of the June 2025 meeting, uncertainty appropriateness of the 4 per cent inflation target, around the global economic outlook had somewhat 2 In May 2016, the Reserve Bank of India Act, 1934 was amended to provide a statutory basis for the inflation targeting framework in India. As per Section 45ZA of the Act, the Central Government, in consultation with the Reserve Bank, is required to set the CPI-based inflation target once in every five years. For the first cycle (2016–2021) and the ongoing second cycle (2021-2026), the RBI was tasked with maintaining inflation at 4 per cent, with a tolerance band of +/- 2 per cent. The next review is due by March 2026. 2Chapter I Macroeconomic Outlook eased, though global sentiments remained weak. prolonged geopolitical tensions, persisting global Domestic economic activity was, however, expected uncertainties and volatility in global financial markets to maintain momentum in 2025-26, supported posed risks. Nonetheless, real GDP projection for by private consumption, traction in fixed capital 2025-26 was retained at 6.5 per cent. The MPC noted formation, and the conclusion of the Free Trade that while growth has held up well, the decline in Agreement (FTA) with the United Kingdom. Given inflation was largely driven by food prices, especially the expected domestic resilience amid challenging vegetables. Inflation was expected to firm up from external environment, the projection of real GDP Q4:2025-26. It also underscored that uncertainties on growth for 2025-26 was retained at 6.5 per cent. tariffs were still evolving, and the impact of past policy Headline CPI inflation continued to decline in rate cuts were still progressing through the economy. Accordingly, the MPC unanimously voted to keep the March and April, led by falling food prices while core repo rate unchanged at 5.5 per cent and to maintain inflation remained largely stable. With the outlook the neutral stance. for food inflation also staying favourable, CPI inflation projection for 2025-26 was again revised The MPC’s voting pattern reflects the diversity in downwards by 30 bps to 3.7 per cent. The MPC noted individual members’ assessments, expectations and that the near- and medium-term outlook for inflation policy preferences – a characteristic also reflected gave confidence that headline inflation would in voting patterns of other central banks (Table I.1). remain durably aligned with the target, and might With the pace of disinflation slowing down or even even undershoot it marginally. However, growth reversing in some AEs, central banks are moving remained lower than aspirations. Accordingly, the cautiously in this easing cycle. Among AEs, the US MPC voted, by a 5-1 majority, to reduce the policy cut its policy rate for the first time this calendar year repo rate by 50 bps to 5.5 per cent, frontloading while Japan kept its policy rates unchanged over its the rate cut to stimulate private consumption and last four meetings. investment through policy levers to step up the growth momentum. One member voted for a smaller Table I.1 Monetary Policy Committees Meetings 25 bps cut in the policy repo rate. The stance was also and Policy Rate Voting Patterns changed from accommodative to neutral, recognising Country Policy Meetings: April 2025 - September 2025 Total Meetings Meetings Variation that after a cumulative policy rate cut of 100 bps in meetings with full without in policy quick succession, monetary policy had limited space consensus full rate (basis consensus points) to support growth further. Brazil 4 4 0 75 In the run up to the August 2025 meeting, headline Chile 4 4 0 -25 Colombia 3 1 2 -25 CPI inflation declined for the eighth consecutive Czech Republic 4 3 1 -25 month to 2.1 per cent in June 2025, primarily driven Hungary* 6 5 0 0 India 3 2 1 -75 by a fall in food prices to new lows. Assuming a normal Japan 4 3 1 0 monsoon, CPI inflation projection for 2025-26 was South Africa 3 1 2 -50 revised downwards to 3.1 per cent. Domestic growth Sweden 4 3 1 -50 Thailand 3 1 2 -50 remained resilient, with private consumption aided UK 4 0 4 -50 by rural demand and fixed investment supported by US 4 2 2 -25 buoyant government capex. Lower inflation, rising Notes: 1. Minus sign indicates a reduction in policy rate. 2. *: Total number of meetings happened is six. However, the capacity utilisation, and congenial financial conditions minutes of last meeting (September 23, 2025) is not published to date. continued to support growth outlook. However, Sources: Central bank websites. 33Factors conditioning the Macroeconomic Outlook Table I.2: Baseline Assumptions for Projections Macroeconomic developments pertaining to inflation Indicator MPR April 2025 MPR October 2025 and economic activity during H1:2025-26 (April- Crude Oil US$ 70 per barrel US$ 70 per barrel September 2025) are analysed in Chapters II and (Indian Basket) during 2025-26 during H2: 2025-26 III. Going forward, the outlook is premised on a Exchange rate ₹ 86/US$ during ₹ 88/US$ during H2: set of baseline assumptions. First, the baseline 2025-26 2025-26 assumption for crude oil prices (Indian basket) is Monsoon Normal for 2025-26 Normal for 2026-27 retained at US$ 70 per barrel for the second half of Global growth 3.1 per cent in 2025 3.0 per cent in 2025 3.0 per cent in 2026 3.1 per cent in 2026 2025-26 (Table I.2). International crude oil prices fell Fiscal deficit To remain within BE To remain within BE sharply in April due to demand concerns stemming (Per cent of GDP) 2025-26 2025-26 from growth-disruptive tariff announcements, and Centre: 4.4 Centre: 4.4 continued its downward trajectory in May as supply Combined: 7.1 Combined: 7.4 outpaced demand, particularly from Organization Domestic macroeconomic/ No major change GST rationalisation structural policies during of the Petroleum Exporting Countries plus (OPEC+) the forecast period economies. In June, however, prices surged Notes: 1. The Indian basket of crude oil represents a derived numeraire intermittently as escalating tensions between Russia comprising sour grade (Oman and Dubai average) and sweet and Ukraine, and intensifying conflict between Israel grade (Brent) crude oil. 2. The exchange rate path assumed here is for the purpose of and Iran, heightened the risk premia amidst fears generating the baseline projections and does not indicate any of supply chain disruptions. Since July, crude prices ‘view’ on the level of the exchange rate. The Reserve Bank is have resumed downward trend, supported by easing guided by the objective of containing excess volatility in the foreign exchange market and not by any specific level of and/or geopolitical tensions and improving fundamentals band around the exchange rate. (Chart I.1a). The consistent rise in crude oil inventory 3. BE: Budget estimates. levels since Q3:2024, and their sustained elevation 4. Combined fiscal deficit refers to that of the Centre and States taken together. through 2025, reflects underlying positive supply- Sources: RBI estimates; Budget documents; and the International side developments including increased output from Monetary Fund (IMF). Chart I.1: Crude Oil Prices and Exchange Rate Dynamics a. Brent Prices b. World Oil Production, c. India's Exchange Rate (US$ per barrel) Consumption and Inventory (INR/USD) 95 (Million barrels per day) 90 107 2.4 2 85 104 1.6 80 1.2 75 101 0.8 70 0.4 65 98 0 60 -0.4 95 -0.8 Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4 2023 2024 2025 Spot price Futures - September 26, 2025 Production Consumption Futures - March 31, 2025 Inventory (RHS) 4 32-naJ 32-luJ 42-naJ 42-luJ 52-naJ 52-luJ 62-naJ 62-luJ 84 85 86 87 88 89 5202-10-10 5202-10-82 5202-20-42 5202-30-32 5202-40-91 5202-50-61 5202-60-21 5202-70-90 5202-80-50 5202-90-10 5202-90-62 Notes: 1. In Chart I.1b, shaded area represents projections. 2. In Chart I.1c, exchange rate series has been plotted in an inverted scale. Sources: Bloomberg; US Energy Information Administration (EIA); and Petroleum Planning & Analysis Cell.Chapter I Macroeconomic Outlook OPEC+ countries3 (Chart I.1b). Considering the average of 3.7 per cent (Chart I.2). The slowdown is downward shift in the oil futures curve since the broad-based, affecting both AEs and emerging market April 2025 MPR, along with projections of higher and developing economies (EMDEs). Growth in AEs production and continued inventory build-up, the is expected to decline to 1.5 per cent in 2025 from supply-demand outlook for crude oil remains broadly 1.8 per cent in 2024, while EMDEs are projected to favourable. Upside risks, however, persist due to grow at 4.1 per cent in 2025, marginally lower than 4.3 heightened geopolitical uncertainty. per cent in 2024. In its Economic Outlook (September Second, in view of ongoing uncertainty surrounding 2025), the Organisation for Economic Cooperation and the US dollar and the volatility in global capital flows, Development (OECD) also anticipates a slowdown, the baseline assumption for the exchange rate has despite a marginal upwards revision for 2025. Global been increased to ₹88 per US dollar for the second GDP growth is projected to decelerate from 3.3 per half of 2025-26, from ₹86 per US dollar in the April cent in 2024, to 3.2 per cent in 2025 and 2.9 per cent 2025 MPR. The Indian rupee appreciated by over 1 in 2026, as front-loading ceases and higher tariff rates per cent (month-on-month [m-o-m]) in April 2025, in and still-high policy uncertainty dampen investment line with other emerging market currencies, mirroring and trade. World trade volume (goods and services), the weakness of the US dollar amidst rising economic as projected by the IMF, is also expected to lose uncertainty in the US (Chart I.1c). Since May and up momentum, with growth slowing from 3.5 per cent to the first half of July, the rupee remained largely in 2024 to 2.6 per cent in 2025 and further to 1.9 per stable, trading around ₹85 per US dollar, despite cent in 2026. This is because the near-term boost from elevated trade tensions and geopolitical risks. From front-loading of trade flows is expected to wane in the mid-July onwards, the rupee exhibited depreciating rest of 2025. Global inflation is projected to ease, with bias, moving within a range of ₹85.8-₹88.76. This movement was driven by portfolio outflows, increase Chart I.2: IMF and OECD projections for Growth and Inflation in US tariff rates on Indian exports, and narrowing (Per cent) interest rate differentials. Nevertheless, India's 6.2 6.0 5.6 strong macroeconomic fundamentals and growth 5.0 prospects continue to provide underlying support to 4.2 the currency. Overall, in H1:2025-26, the Indian rupee 4.0 3.3 3.03.1 3.33.2 2.9 3.6 3.4 2.9 exhibited two-way movement, hovering close to ₹86.4 3.0 per US dollar, on average, with volatility lower than 2.0 that of most other emerging market economy (EME) 1.0 currencies.4 0.0 Third, according to the International Monetary Fund IMF OECD IMF OECD -1.0 GDP Inflation (IMF), the global economy is projected to grow at 2024 2025 2026 3.0 per cent in 2025 and 3.1 per cent in 2026. These Note: OECD inflation projections are for G-20 countries. projections are below the estimated outcome of 3.3 Sources: World Economic Outlook July 2025 Update, IMF; and Economic Outlook September 2025, OECD. per cent in 2024 and the pre-pandemic historical 3 On August 3, OPEC+ members again agreed to accelerate their scheduled production increases. The 2.2 million barrels per day (b/d) of production cuts announced in November 2023 and initially scheduled to be fully unwound by September 2026 will now be fully unwound by September 2025. Also, on September 7, OPEC+ announced that it plans to raise production by 137 thousand b/d in October 2025. 4 Indian rupee was less volatile, calculated via standard deviation, than MSCI EME currency index during H1:2025-26. 55headline inflation expected at 4.2 per cent in 2025 and urban households moderated by 20 bps to 8.1 per cent 3.6 per cent in 2026, supported by softening energy and 30 bps to 8.7 per cent, respectively. The shares of prices and subdued demand conditions. Inflation respondents anticipating a rise in inflation declined dynamics are, however, expected to diverge across for the near term and year ahead compared to the economies. In the US, tariffs are likely to function previous round (Chart I.3a). Urban households’ long- as a supply-side shock, gradually passing through term expectations on inflation have been sequentially to consumer prices and pushing inflation higher in declining for the past four survey rounds. Additionally, the latter half of 2025. In contrast, higher tariffs are as per the Reserve Bank’s recent bi-monthly Rural expected to dampen export demand and thereby exert Consumer Confidence Survey (RCCS)6, the current downward pressure on inflation in other regions. perception of inflation (vis-à-vis a year ago) of the I.2 The Outlook for Inflation rural and semi-urban households inched up by 10 bps to 5.9 per cent in September 2025 as compared In H1:2025-26 (up to August), headline inflation has with the previous round. However, their year remained well below 4 per cent driven by benign ahead inflation expectations declined by 30 bps to food prices and favourable base effects. However, it 7.6 per cent (Chart I.3b). Rural households’ long increased to 2.1 per cent in the month of August as term expectations of inflation has been sequentially compared to 1.6 per cent in July 2025 which is a first declining for the past five rounds of survey. increase recorded after nine consecutive months of decline. In the September 2025 round of the Reserve Manufacturing firms polled in the July-September Bank’s bi-monthly households survey5, the three 2025 round of the Reserve Bank’s quarterly months and one year ahead inflation expectations of industrial outlook survey expect pressures from Chart I.3: Inflation Expectations of Households a. Urban Households b. Rural Households [In(cid:28)lation rate (Per cent), left scale; (Per cent) Proportion of respondents (Per cent), right scale] 13 80 12 70 11 10 60 9 50 8 7 40 6 30 5 4 20 Sources: Inflation Expectations Survey of Households; and Rural Consumer Confidence Survey of Households, RBI. 5 The Reserve Bank’s inflation expectations survey of households is being conducted in 19 cities since March 2021 (18 cities in the previous rounds) and the results of the September 2025 round are based on responses from 6,082 households. 6 The Reserve Bank’s rural consumer confidence survey is being conducted across all Indian states and three major UTs since July 2024 and the results of the September 2025 round are based on responses from 8,848 respondents. 6 22-yaM 22-luJ 22-peS 22-voN 32-naJ 32-raM 32-yaM 32-luJ 32-peS 32-voN 42-naJ 42-raM 42-yaM 42-luJ 42-peS 42-voN 52-naJ 52-raM 52-yaM 52-luJ 52-peS 11 10 9 8 7.6 7 5.9 6 5 4 Three months ahead (Median) One year ahead (Median) Three months ahead price increase more than the current rate (RHS) One year ahead price increase more than the current rate (RHS) 32-peS 32-voN 42-naJ 42-raM 42-yaM 42-luJ 42-peS 42-voN 52-naJ 52-raM 52-yaM 52-luJ 52-peS Current Perception (Median) One year ahead Expectation (Median)Chapter I Macroeconomic Outlook cost of raw materials to ease in Q3:2025-26. The at 4.2 per cent during Q2:2025-26, thereafter, remain growth in selling prices is expected to be higher around 4.0 per cent till Q4 and further soften to 3.8- vis-à-vis the previous quarter (Chart 1.4a).7 Services 3.9 per cent in H1:2026-27. firms expect stable input cost pressures but higher Long-run inflation expectations of professional growth in selling prices in Q3, while firms from forecasters – measured by their five and ten years infrastructure sector anticipate easing of cost pressures ahead expectations – have eased to 4.0 per cent in the and expect lower growth in selling prices. (Chart 1.4b current round (Chart 1.5b). and 1.4c).8 In the Purchasing Managers’ Index (PMI) Looking ahead, the inflation outlook will depend upon surveys for August 2025, services firms reported a several factors, both global and domestic. Assuming a substantial increase in input and output prices vis- normal monsoon and a sustained reduction in food à-vis the previous month due to higher labour costs inflation, the quarterly CPI inflation forecasts for and robust demand conditions, while manufacturing 2025-26 have been adjusted downward in RBI staff firms reported only a marginal increase in both prices. projections. Nevertheless, inflation is expected to rise Professional forecasters surveyed by the Reserve Bank from the final quarter of this financial year, yet the in September 2025 forecasted CPI inflation to decrease recent GST rationalization among other favourable from 2.7 per cent in Q1:2025-26 to 1.9-2.0 per cent factors will help keep overall inflation low during 2025-26. While the uncertainties surrounding tariffs in Q2 and Q3. It is expected to increase gradually continue to remain, the impact of previous policy rate to 3.6 per cent in Q4 and further to 4.2 per cent in reductions are still unfolding. H1:2026-27 (Chart I.5a and Table I.3).9 Core inflation (i.e., CPI excluding food and beverages, pan, tobacco Considering the initial conditions, signals from and intoxicants, and fuel and light) is expected to be forward-looking surveys and estimates from time- Chart I.4: Expectations about Cost of Raw Materials/Inputs and Selling Prices a. Manufacturing Firms b. Services Firms c. Infrastructure Firms [Net response (Per cent)] [Net response (Per cent)] [Net response (Per cent)] 80 60 40 24.1 20 0 -20 -40 -45.6 -60 -80 -100 Note: Net response is the difference between the share of respondents reporting optimism and those reporting pessimism. The range is -100 to 100. A positive/ negative value of net response is considered as optimistic/pessimistic from the viewpoint of respondent firms. Therefore, higher positive values of selling prices indicate increase in output prices while lower values for the cost of raw materials/cost of inputs indicate higher input price pressures and vice versa. Sources: Industrial Outlook Survey and Services and Infrastructure Outlook Survey, RBI. 7 The results of the July-September 2025 round of the industrial outlook survey are based on responses from 1,106 companies. 8 Based on 614 services companies and 92 infrastructure firms polled in the July-September 2025 round of the services and infrastructure outlook survey. 9 Forty-eight panellists participated in the September 2025 round of the Reserve Bank’s Survey of Professional Forecasters. 77 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 80 60 45.8 40 20 0 -20 -40 -60 -53.5 -80 -100 2022-23 2023-24 2024-25 2025-26 Cost of raw materials Selling price 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 80 60 40 43.6 20 0 -20 -40 -57.8 -60 -80 -100 2022-23 2023-24 2024-25 2025-26 Cost of inputs Selling price 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 2022-23 2023-24 2024-25 2025-26 Cost of inputs Selling priceChart I.5: Inflation Expectations of Professional Forecasters a. Short-run* b. Long-run (Per cent) (Per cent) 8 6 7 6 5 5 4.2 4.2 4 3.6 4 3 1.9 2.0 2 1 3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2023-24 2024-25 2025-26 2026-27 Actual Median projection Survey Round *: Four quarters ahead expectations in September 2025. Five years ahead Ten years ahead Sources: Survey of Professional Forecasters, RBI; and National Statistics Office. Table I.3: Projections - Reserve Bank and Professional Forecasters (Per cent) 2025-26 2026-27 Reserve Bank’s Baseline Projections Inflation 2.6 4.5 Real GDP growth 6.8 6.6 Median Projections of Professional Forecasters Inflation, Q4 (y-o-y) 3.6 - Real GDP growth 6.7 6.5 Gross domestic saving (per cent of GNDI) 30.0 30.4 Gross capital formation (per cent of GDP) 32.8 33.0 Credit growth of scheduled commercial banks 11.0 11.5 Combined gross fiscal deficit (per cent of GDP) 7.4 7.1 Central government gross fiscal deficit (per cent 4.4 4.2 of GDP) Repo rate (end-period) 5.25 - Yield on 91-days treasury bills (end-period) 5.5 6.0 Yield on 10-year central government securities 6.4 6.5 (end-period) Overall balance of payments (US$ billion) 7.6 20.0 Merchandise exports growth 0.2 5.0 Merchandise imports growth 2.5 6.0 Current account balance (per cent of GDP) -0.9 -0.9 Note: GNDI: Gross National Disposable Income. Source: RBI staff estimates; and Survey of Professional Forecasters (September 2025). 8 61-peS 71-raM 71-peS 81-raM 81-peS 91-raM 91-peS 02-raM 02-peS 12-raM 12-peS 22-raM 22-peS 32-raM 32-peS 42-raM 42-peS 52-raM 52-peS series and structural models10, CPI inflation is projected to average 2.6 per cent in 2025-26 with 1.8 per cent in both Q2 and Q3 and 4.0 per cent in Q4, with risks evenly balanced (Chart I.6 and Table 1.3). The 50 per cent and the 70 per cent confidence intervals for headline inflation in Q4:2025-26 are Chart I.6. Projection of CPI Inflation (y-o-y) (Per cent) 10 8 6 4 2 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2023-24 2024-25 2025-26 2026-27 50 per cent CI 70 per cent CI 90 per cent CI CI-Confidence Interval Note: The fan chart depicts uncertainty around the baseline projection path. The baseline projections are conditioned upon the assumptions set out in Table I.2. The thick red shaded area represents 50 per cent confidence interval, implying that there is 50 per cent probability that the actual outcome will be within the range given by the thick red shaded area. Likewise, for 70 per cent and 90 per cent confidence intervals, there is 70 per cent and 90 per cent probability, respectively, that the actual outcomes will be in the range represented by the respective shaded areas.(cid:143) Source: RBI staff estimates. 10 Joice John, Deepak Kumar, Asish Thomas George, Pratik Mitra, Muneesh Kapur and Michael Debabrata Patra (2023), “A Recalibrated Quarterly Projection Model (QPM 2.0) for India”, Reserve Bank of India Bulletin, February, Volume LXXVII(2), pp.59-77.Chapter I Macroeconomic Outlook 3.0-5.0 per cent and 2.4-5.6 per cent, respectively. I.3 Growth Outlook For 2026-27, assuming a normal monsoon, and no Domestic economic activity remains resilient, further exogenous or policy shocks, structural model supported by strong private consumption, government estimates indicate that inflation will average 4.5 per consumption and fixed investment. An above-normal cent with 4.5 per cent in both Q1 and Q2, 5.1 per cent southwest monsoon, congenial financial conditions, in Q3 and 3.9 per cent in Q4. The 50 per cent and the rising capacity utilisation, the government’s continued 70 per cent confidence intervals for headline inflation thrust on capital expenditure, and GST 2.0 reforms in Q4:2026-27 are 2.4-5.3 per cent and 1.6-6.1 per cent, augured well for the growth outlook. Improving respectively. credit conditions are also likely to spur aggregate The baseline forecasts are subject to several upside demand conditions in the near-term (Box I.1). and downside risks. The upside risks emanate from However, outlook remains uncertain due to external supply disruptions caused by weather-related shocks demand uncertainty driven by tariffs; prolonged and prolonged geopolitical conflicts. The downside geopolitical tensions; and volatility in global financial risks could emanate from an early resolution of markets. geopolitical conflicts and tariff related uncertainties; global growth moderation; softening commodity Turning to the key messages from forward-looking prices; and improvement in supply conditions. surveys, bi-monthly consumer confidence (the Box I.1: The Effect of Credit Conditions on Monetary Policy The interest rate channel is central to the conduct of higher index indicating tighter credit supply. This index monetary policy under inflation targeting: the central is estimated using India’s credit-to-GDP gap series of the bank influences the price of credit (interest rates) through Bank for International Settlements (BIS), controlling for its control over the price of bank reserves. This, ceteris aggregate demand conditions and the effects of monetary paribus, affects the quantity of lending and thereby policy. Credit supply conditions eased substantively in demand conditions in the economy. This is considered the response to counter the economic fallout of the Covid-19 primary channel of macroeconomic stabilization through pandemic, but tightened significantly thereafter to control monetary policy. Yet, this textbook narrative and its the inflationary fallout of the Russia-Ukraine conflict. underlying assumptions simplify the more sophisticated Subsequently, credit supply conditions have eased. In this role played by credit-issuing financial institutions in context, the size of recent deviation of the credit supply modern monetary economies. index from its average value is used here to simulate the macroeconomic impact of shocks to credit supply in the Changes in funding costs are an important determinant Indian economy using the Quarterly Projection Model of portfolio management by credit-issuing financial (QPM 2.0). institutions, with loan creation on the asset side being the key indicator of importance from a monetary policy Chart I.1.1.b shows the baseline path and probability perspective. However, credit supply is also influenced distribution of credit conditions of an expansionary by macroeconomic outlook, financial stability concerns, shock to credit supply (a negative shock indicates looser regulatory requirements, institutional objectives, and credit conditions) as observed in the recent period with broader uncertainties. Thus, the resulting financial an assumption of no further shocks of any kind to the strategies can generate shifts in credit supply, at times economy. In the baseline case, buoyant credit supply autonomous of monetary policy. These shifts nonetheless may spur aggregate demand conditions in the near-term have implications for monetary policy. (Chart I.1.1.c), with quantity effects moderating in the medium-term. However, such a shock may push up core Chart I.1.1.a presents an index of the supply of credit in the Indian economy in the post-Covid19 period, with a (Contd.) 99Chart I.1.1: Impact of Credit Conditions a. An Index of Credit Supply in the Recent Period Note: The credit supply index here has been derived econometrically by regressing the credit-to-gdp gap on output gap with appropriate leads and lags. The residual series has been smoothened using a state-space model with stochastic volatility framework, and is an index of credit supply. The dotted lines represent one standard deviation dispersion. Higher index indicates tighter credit supply. b. Effect of Changes in Credit Supply on c. Effect of Changes in Credit Conditions on Aggregate Credit Conditions Aggregate Demand Note: higher index indicates tighter credit conditions. The dark line is the baseline case of expansionary shock to credit supply with the dispersion representing variance conditional on shock size. The subsequent path is under the assumption of no further macroeconomic shocks of any kind. d. Effect of Changes in Credit Conditions on e. Effect of Changes in Credit Conditions on Headline Inflation the Projected Policy Rate Path and therefore headline inflation (Chart I.1.1.d), with price Reference: rigidities leading to prolonged adjustment. Consequently, Joice John, Deepak Kumar, Asish Thomas George, Pratik the projected policy rate path may harden to counter- Mitra, Muneesh Kapur and Michael Debabrata Patra cyclically stabilise the economy (Chart I.1.1.e). The spread (2023), “A Recalibrated Quarterly Projection Model (QPM of the fan charts indicate that the probability distribution 2.0) for India”, Reserve Bank of India Bulletin, February, in these macroeconomic variables is conditional upon the Volume LXXVII(2), pp.59-77. assumption of balanced risks and the change in credit conditions. 10Chapter I Macroeconomic Outlook current situation index) for both urban11 and rural12 Recent surveys by other agencies indicate a mixed households improved marginally in September 2025 picture on business expectations relative to the vis-à-vis the previous round on account of improved previous round (Table I.4). In the PMI surveys for sentiments across most of the survey parameters. August 2025, both manufacturing and services firms Although it remains in the pessimistic zone for urban reported improvements in a year ahead sentiment, households, it is in the optimistic zone for rural driven by expectations of stronger demand. households. Professional forecasters polled in September 2025 Consumers’ optimism for the year ahead, measured by round of the Reserve Bank’s survey projected real GDP the future expectations index, strengthened further growth at 6.8 per cent during Q2:2025-26. Growth is for both urban and rural households, remaining in expected around 6.1-6.5 per cent during Q3:2025-26 optimistic territory (Chart I.7). to Q2:2026-27 (Chart I.9). In the Reserve Bank’s quarterly industrial outlook Real GDP growth was higher at 7.8 per cent in Q1:2025- survey of July-September 2025, manufacturing firms 26 as compared with 7.4 per cent in Q4:2024-25, continued to hold an optimistic business outlook mainly driven by robust fixed investment, private and (BAI/BEI)13 during Q3:2025-26 (Chart I.8a). The Government consumption. Taking into account the services and infrastructure companies also continue baseline assumptions, survey indicators and model to remain optimistic on overall business situation in forecasts, real GDP growth is expected at 6.8 per cent Q3:2025-26 (Charts I.8b and I.8c). in 2025-26 with 7.0 per cent in Q2; 6.4 per cent in Q3; Chart I.7: Consumer Confidence a. Urban Households b. Rural Households (Index) (Index) 130 125 127.9 120 110 100 96.9 90 100.9 80 70 60 50 40 Sources: Urban Consumer Confidence Survey; and Rural Consumer Confidence Survey, RBI. 11 The Reserve Bank’s urban consumer confidence survey is being conducted in 19 cities since March 2021 (13 cities in the previous rounds) and the results of the September 2025 round are based on responses from 6,068 respondents. 12 The Reserve Bank’s rural consumer confidence survey is being conducted across all Indian states and three major UTs since July 2024 and the results of the September 2025 round are based on responses from 8,848 respondents. 13 Business Assessment Index (BAI)/Business Expectations Index (BEI) gives a snapshot of demand conditions in the manufacturing sector by combining nine parameters – (i) overall business situation, (ii) production, (iii) order books, (iv) inventory of raw material, (v) inventory of finished goods, (vi) profit margin, (vii) employment, (viii) exports and (ix) capacity utilisation. A value above 100 indicates an expansion of the overall business activity and value below 100 indicates contraction. 1111 22-yaM 22-luJ 22-peS 22-voN 32-naJ 32-raM 32-yaM 32-luJ 32-peS 32-voN 42-naJ 42-raM 42-yaM 42-luJ 42-peS 42-voN 52-naJ 52-raM 52-yaM 52-luJ 52-peS 130 120 110 100 90 80 32-peS 32-voN 42-naJ 42-raM 42-yaM 42-luJ 42-peS 42-voN 52-naJ 52-raM 52-yaM 52-luJ 52-peS Current Situation Index Future Expectations Index Current Situation Index Future Expectations IndexChart I.8: Business Assessment and Expectations a. Manufacturing Firms b. Services Firms c. Infrastructure Firms (Index) [Net Response on Overall Business Situation (Per cent)] [Net Response on Overall Business Situation (Per cent)] 140 130 126.3 120 110 110.6 100 Sources: Industrial Outlook Survey; and Services and Infratructure Outlook Survey, RBI. and 6.2 per cent in Q4 – and risks evenly balanced further escalation in geopolitical tensions; volatility around this baseline path (Chart I.10 and Table I.3). in global financial markets; frequent weather-related Assuming a normal monsoon and no major exogenous disturbances; and supply chain disruptions pose or policy shocks, structural model estimates for 2026- downside risks to the baseline growth path. 27 indicate real GDP growth at 6.6 per cent, with Q1 at I.4 Balance of Risks 6.4 per cent, Q2 at 6.6 per cent, Q3 at 6.8 per cent and The baseline projections of growth and inflation are Q4 at 6.5 per cent. conditional on assumptions relating to key domestic There are upside and downside risks to this baseline and global macroeconomic variables that are set out growth path. The upside risks emanate from revival in private investment; early resolution of global trade related issues; and sustained softening of global commodity prices. On the contrary, increasing trade fragmentation due to protectionist policies; Table I.4: Business Expectations Surveys NCAER Dun and Bradstreet Business Composite Item Confidence Business Index Optimism Index (August 2025) (July 2025) Current level of the index 149.4 117.5 Index as per previous survey 139.3 120.2 % change (q-o-q) sequential 7.3 -2.3 % change (y-o-y) -0.3 4.8 Notes: 1. NCAER: National Council of Applied Economic Research. 2. Dun and Bradstreet Composite Business Optimism Index is for Q2:2025-26 and NCAER Business Confidence Index is for Q1:2025:26. Sources: NCAER and Dun & Bradstreet Information Services India Pvt. Ltd. 12 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 80 73.2 60 40 37.2 20 0 2022-23 2023-24 2024-25 2025-26 Assessment Expectations Assessment Expectations Assessment Expectations 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 80 67.8 60 40 35.2 20 0 2022-23 2023-24 2024-25 2025-26 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 2022-23 2023-24 2024-25 2025-26 Chart I.9: Professional Forecasters' Projection of Real GDP Growth (Per cent) 14 12 10 8 6.8 6.4 6.2 6.1 6.5 6 4 2 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2023-24 2024-25 2025-26 2026-27 Actual Median projection Sources: Survey of Professional Forecasters, RBI; and National Statistics Office.Chapter I Macroeconomic Outlook rates elevated despite weak growth. Global economic Chart I.10: Projection of Growth in Real GDP (y-o-y) outlook is also subject to headwinds from adverse (Per cent) weather shocks and technological disruptions. 12 Given this backdrop, if global growth turns out to be 100 bps below the baseline, domestic growth and 8 inflation could be lower by around 30 bps and 15 4 bps, respectively. On the upside, a more constructive outcome from trade negotiations resulting in reduced 0 tariffs and a stable framework could bolster global 2023-24 2024-25 2025-26 2026-27 growth. Moreover, growth could improve if major 50 per cent CI 70 per cent CI 90 per cent CI economies work together on policies that stabilise prices and strengthen fiscal position, and push Note: The fan chart depicts uncertainty around the baseline projection path. The baseline projections are conditioned upon the assumptions set out in Table I.2. The forward structural reforms. On the positive side, thick green shaded area represents 50 per cent confidence interval, implying that there is 50 per cent probability that the actual outcome will be within the range given by the thick green shaded area. Likewise, for 70 per cent and 90 per cent confidence intervals, if global growth is higher by 50 bps relative to the there is 70 per cent and 90 per cent probability, respectively, (cid:31)that the actual outcomes will be in the range represented by the respective shaded areas.(cid:31) baseline, domestic growth and inflation could turn out Source: RBI staff estimates. to be higher by around 15 bps and 7 bps, respectively in Table 1.2. These baseline assumptions are subject (Charts I.11a and I.12a). to uncertainties emanating from US trade policies, (ii) International Crude Oil Prices protracted geopolitical hostilities, volatility in global financial markets and adverse weather shocks. Against Global crude oil prices exhibited a declining trend this backdrop, this section explores the balance of with Brent crude falling from a high of US$ 77 per risks around the baseline projections of inflation and barrel in early-April 2025 to US$ 68 per barrel during growth under plausible alternative scenarios. September 2025. Protracted geopolitical tensions resulting in reduced supply, sanctions on major oil (i) Global Growth Uncertainties producing countries, supply shortages due to lower Global economic activity remained steady in H1:2025, investment in new oil projects owing to energy but the driver of growth was mainly the frontloading transitions and faster than expected recovery in of exports. The economic landscape world-wide global demand may put upward pressure on crude oil remains in flux amidst shifting trade pattern and prices. In this scenario, if crude oil prices are higher persisting uncertainty about US trade policies with by 10 per cent than the baseline, and assuming full key partners, posing considerable downside risks to pass-through to domestic product prices, inflation global growth prospects. Additionally, heightened could turn out to be higher by 30 bps and growth may geopolitical tensions could further disrupt global be lower by around 15 bps. Conversely, weak global supply chains and exacerbate upward pressure on demand conditions as discussed above, unwinding of commodity prices. Wider fiscal imbalances or a shift towards greater risk aversion could push up long-term production cuts by OPEC+ countries given effective interest rates and tighten global financial conditions. spare capacity in major producing countries, and Along with concerns on geo-economic fragmentations, quicker resolution of geopolitical conflicts may such developments may spark volatility in global dampen crude oil prices. If crude oil prices are lower financial markets with spillover effects in emerging by 10 per cent relative to the baseline, inflation could market economies (EMEs). The persistent inflation be lower by around 30 bps and boosting GDP growth pressures could prompt major central banks to keep by 15 bps (Charts I.11a and I.12a). 1133 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q CI-Confidence IntervalChart I.11: Impact of Risk Scenarios on the Baseline Inflation Path a. Crude Oil Prices and Global Demand Shocks b. Exchange Rate and Food Price Shocks (Per cent) (Per cent) 6.0 5.0 4.0 3.0 2.0 1.0 Higher crude price Lower crude price Global growth slowdown Global growth recovery Baseline Sources: RBI staff estimates. (iii) Exchange Rate exacerbated by growing risk aversion on EMEs among global investors. Strengthening of the US dollar may Notwithstanding intermittent phases of appreciation, also lower the attractiveness of EME assets. Higher the Indian Rupee (INR) depreciated vis-à-vis the US international crude oil prices due to sanctions and dollar during April-September 2025, largely owing persisting geopolitical tensions may also contribute to global trade uncertainties and capital outflows. Going ahead, volatility in global financial markets to weakening of the INR. In this scenario, if INR owing to slowing global trade and demand may exert depreciates by 5 per cent over the baseline, inflation downward pressure on the currency. This may be could be higher by around 35 bps and GDP growth 14 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2024-25 2025-26 2026-27 Exchange rate depreciation Exchange rate appreciation Higher food inflation Lower food inflation Baseline 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2024-25 2025-26 2026-27 Chart I.12: Impact of Risk Scenarios on the Baseline Growth Path a. Crude Oil Prices and Global Demand Shocks b. Exchange Rate and Food Price Shock (Per cent) (Per cent) 9.0 9.0 8.0 8.0 7.0 7.0 6.0 6.0 5.0 5.0 4.0 4.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2024-25 2025-26 2026-27 2024-25 2025-26 2026-27 Higher crude price Lower crude price Exchange rate depreciation Exchange rate appreciation Global growth recovery Global growth slowdown Higher food inflation Lower food inflation Baseline Baseline Sources: RBI staff estimates.Chapter I Macroeconomic Outlook may benefit by around 25 bps through the exports to adverse weather events may increase food prices. channel in the short term. On the other hand, the These circumstances may result in higher headline Indian rupee has been the least volatile among EMDE inflation by 50 bps vis-à-vis the baseline (Charts currencies, drawing confidence from stable inflation I.11b and I.12b). and resilient growth outlook. Going ahead, these I.5 Conclusion positive sentiments along with greater than expected Domestic economic activity remains resilient and monetary policy accommodation by the major central is expected to maintain momentum, supported by banks and improved trade outlook may attract capital domestic drivers, despite weak external demand. inflows, lending support to the INR. In this scenario, The GST 2.0 reforms are expected to boost private an appreciation of 5 per cent of the INR relative to the consumption and domestic demand. Rising capacity baseline would lead to a moderation in inflation and utilisation, strong corporate and bank balance sheets, GDP growth by around 35 bps and 25 bps, respectively and favourable financial conditions are likely to (Charts I.11b and I.12b). further support investment and growth. India’s (iv) Food Inflation recent credit rating upgrades reflect growing global confidence in the country’s economic resilience Food prices turned deflationary in recent months due and growth prospects. Headline inflation has seen to a sharp fall in vegetable prices owing to subdued significant moderation during H1:2025-26 (up to seasonal uptick, supported by government’s effective August), mainly due to a sharp correction in food supply side measures, and favourable base effect. Soft prices. Inflation expectations of households and prices prevailed across food categories, with pulses professional forecasters have also eased. Inflation is and spices continuing to remain in deflation, while expected to remain broadly aligned with the target, cereal inflation exhibited a pronounced moderation. despite edging up from Q4:2025-26 as favourable base The strong monsoon and the resultant robust kharif effects wane and demand strengthens on the back of sowing, large buffer stocks, and improved prospects policy action. Core inflation is also expected to remain for rabi crops from adequate reservoir levels could keep contained. Nonetheless, risks from adverse weather pressures on food inflation muted. In such a scenario, events, evolving tariff actions, and volatile global headline inflation may moderate by around 50 bps financial markets pose headwinds to growth and relative to the baseline. On the other hand, higher inflation. However, India’s robust macroeconomic than expected momentum in the prices of perishable fundamentals, along with a strong external position, food items and lower agricultural production owing provide resilience against such shocks. 1155Monetary Policy Report October 2025 II. Prices and Costs Headline CPI inflation continued on a declining trajectory during H1:2025-26, except for the pick-up in August. The decline in inflation was driven by the food group as favourable weather conditions and increase in production augmented supply. Core inflation remained rangebound around 4 per cent despite rising gold prices exerting significant upside pressures. Overall cost conditions remained benign, with industrial and farm input cost pressures staying soft and wage pressures remaining muted. II.1 Introduction core group (CPI excluding food and fuel)3 registered a Headline consumer price index (CPI) inflation1 moderate increase during this period. declined for nine consecutive months to reach an In terms of monthly trajectory of headline CPI during 8-year low of 1.6 per cent in July 2025 before edging 2025-26, a positive momentum4 was observed across up to 2.1 per cent in August (Chart II.1). The decline successive months during April-August. Up to July, in inflation was driven by the food group, as its favourable base effects, however, offset its impact, contribution declined from a large positive to zero leading to a moderation in y-o-y inflation (Chart II.3). between October 20242 and August 2025 (Chart II.2). The contribution of the fuel group turned marginally In the absence of any base effects, y-o-y inflation positive from marginally negative while that of the recorded an increase in August.5 Chart II.1: CPI Inflation Chart II.2: Contributors to Decline in Headline Inflation (Y-o-y, per cent) 14 (Percentage points) 12 7 6.2 per cent 10 6 8 5 6 4 4.2 4 4.6 2.4 2 2.1 3 0 0.0 2.1 per cent 0.2 -2 2 -4 1 1.7 1.9 -6 0 -0.1 -1 October 2024 (Recent high) August 2025 Food and beverages Fuel and light CPI excluding food and fuel Sources: National Statistical Office (NSO); and RBI staff estimates. Sources: NSO; and RBI staff estimates. 1 Headline inflation is measured by year-on-year (y-o-y) changes in the all-India consumer price index (CPI) published by the National Statistical Office (NSO), Ministry of Statistics and Programme Implementation, Government of India. 2 CPI inflation recorded an intra-year peak of 6.2 per cent in October 2024. 3 Core group CPI, i.e., CPI excluding food and fuel is worked out by eliminating the groups ‘food and beverages’ and ‘fuel and light’ from the headline CPI. 4 A change in CPI year-on-year (y-o-y) inflation between any two months is the difference between the current month-on-month (m-o-m) change in the price index (momentum) and the m-o-m change in the price index 12 months earlier (base effect). For more details, see Box I.1 of the MPR, September 2014. 5 Headline CPI remained unchanged between July and August 2024, leading to no base effect for August 2025. 16 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 52-rpA 52-nuJ 52-guA Tolerance band Headline Food and beverages Fuel and light Target CPI excluding food and fuelChapter II Prices and Costs Chart II.3: Change in CPI Headline Inflation: Momentum and Base Effects (Percentage points) 3 2 1 0.5 0.5 0 -1 -2 -3 Sources: NSO; and RBI staff estimates. The April 2025 MPR projected inflation at 3.8 per cent in October 2024 to (-) 0.8 per cent (y-o-y) in July 2025. in Q4:2024-25 and 3.6 per cent in Q1:2025-26 (Chart The decline in food inflation for nine consecutive II.4).6 The actual outcomes turned out to be lower months up to July, a first in the current CPI series than projections for Q1:2025-26 by 90 bps. Realised (CPI:2012=100), was the largest both in terms inflation lower than projections was primarily on of magnitude and duration (Table II.1). This was account of faster than expected as well as a more marked by two distinct phases. During November protracted decline in food prices during the winter, 2024-April 2025, prices declined in absolute levels which extended up to April, the longest (9 months) (negative momentum), which drove the overall decline in CPI headline inflation. Since May, and steepest (10.5 per cent) consecutive decline in although food prices recorded a seasonal pick- prices in the current CPI series. Thereafter, milder up, large favourable base effects offset the muted than usual summer temperatures dampened the extent of price reversals during the summer months, Table II.1: Major Episodes of Decline in as reflected in below historical average price build-up Food Inflation leading to lower-than-expected realised inflation in Period* Cumulative Decline No. of Months Q1 and Q2:2025-26 so far. (Percentage points) II.2 Developments across Major Components of the Nov-2024 to July-2025 -10.5 9 Dec-2013 to Feb-2014 -8.5 3 CPI Nov-2020 to Jan-2021 -7.4 3 CPI Food Group Aug-2014 to Nov-2014 -6.7 4 Aug-2016 to Jan-2017 -6.6 6 Food and beverages group7 witnessed a sharp decline Note: *Includes episodes with more than 5 per cent cumulative decline. in inflation from a peak of 9.7 per cent (y-o-y) Sources: NSO; and RBI staff estimates. 6 The Reserve Bank of India (RBI) Act, 1934 (amended in 2016) enjoins the RBI to set out deviations of actual inflation outcomes from projections, if any, and explain the underlying reasons thereof. 7 With a weight of 45.9 per cent for food and beverages group in the overall CPI-Combined basket, developments in food inflation have a major impact on the overall inflation trajectory. 1177 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 52-rpA 52-nuJ 52-guA Chart II.4: CPI Inflation: Projection versus Actual (Y-o-y, per cent) 4.0 3.8 3.7 3.6 3.5 3.0 2.7 2.5 2.0 1.5 1.0 0.5 0.0 Q4:2024-25 Q1:2025-26 M-o-m change Base effect Monthly change in y-o-y inflation (per cent) April 2025 MPR projection Actual Sources: NSO; and RBI staff estimates.Monetary Policy Report October 2025 Chart II.5: CPI Food Inflation a. CPI Food and Beverages b. Price Build-up in CPI Food and Beverages (Percentage points) (Per cent) 10 8 6 4 3.3 2 0 -2 Sources: NSO; and RBI staff estimates. positive momentum to keep y-o-y inflation on production, wholesale market arrivals, favourable a declining trajectory (Chart II.5a). In August, a trade policies and proactive supply management, led positive momentum and an unfavourable base effect the decline in food inflation. Notably, the absence of together led to food prices coming out of deflation, extreme weather events till August restricted the extent recording near-zero inflation. Overall, during 2025- of volatility typically associated with food inflation. 26 (up to August), the build-up in prices has been An analysis of food price cycles in India shows that below both last year’s trend and historical average there are considerable swings in food inflation, with (Chart II.5b). downturns being longer than upswings, while the A combination of favourable supply-side factors, such amplitudes of upward movements are greater than as comfortable stocks of foodgrains on higher domestic those of downward movements (Box II.1). Box II.1: Sharp Rise and Slow Fade: Nature of Food Inflation Cycles in India Food prices in India exhibit significant volatility while identified through estimating local peaks and troughs witnessing periods of booms and slumps.8 A number by the following equations: of studies have characterised the nature of food price P max P k = 1, 2, ….,m, where m is set to 12 volatility in the Indian context, although very few have t,peak t k covered on the nature of cycles in food price inflation in P = min( P± ), k=1, 2, ….,m, where m is set to 12 t,trough t k India (Sekhar et al., 2018). Based on identified turning Based o =n the ( lo±c )a ,l peaks and troughs, duration and points using cycle dating literature (Bry and Boschan, amplitudes of phases (booms and slumps) and full 1971) and subsequent refinements (Cashin et al., 2002; cycles [peak-to-peak (PP) and trough-to-trough (TT)] are World Bank, 2025), the nature of food inflation cycles marked off. Boom is defined as the duration in months in India is examined for the period January 2012 to between trough to peak, while slump is the duration June 2025. Turning points for food inflation cycles are in months between peak to trough. The full cycle PP is (Contd.) 8 Boom refers to price spikes. 18 rpA yaM nuJ luJ guA peS tcO voN ceD naJ beF raM 0.6 0.3 0.0 2023-24 2025-26 M-o-m change Base effect Y-o-y inflation (per cent) 2024-25 Average: 2017-18 to 2022-23 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guA 12.0 10.0 8.0 6.0 4.0 2.0 0.0 -2.0 -4.0Chapter II Prices and Costs defined as slump followed by boom, while a cycle TT Bank, 2025). Conversely, booms are often sharp but is defined as boom followed by a slump. Amplitude is transient, as they are frequently induced by sudden the magnitude of price movements during the phase of supply-side disruptions such as extreme weather events boom and slump measured as log differences. or geopolitical shocks. Full cycles are characterised as PP and TT, with an average duration of 40 months each. Price Cycles and Turning Points Booms have an average amplitude of 17 per cent, far Since January 2012, food inflation in India has surpassing the slumps’ amplitude of 9 per cent (Chart exhibited recurrent cycles, witnessing five troughs II.1.2b). The amplitudes of TT and PP are comparable and four peaks (Chart II.1.1a). At any particular month, for full cycles, and the wide interquartile ranges signify certain food sub-groups’ prices may be in a boom phase variable intensities of full cycles. while others may be in a slump phase. A weighted Cycle Characteristics across Food Sub-groups share of sub-groups in slumps and booms reveals that, Booms are characterised by a greater amplitude than on average, 45 per cent were in a boom phase while slumps across all sub-groups. Pulses and products, 55 per cent were in a slump phase in any given month and vegetables have experienced a larger amplitude (Chart II.1.1b). Over the sample period, however, this and substantial variation. Slumps endure longer than exhibited large variation, with the share of food sub- booms across different food sub-groups, barring pulses groups in the boom phase peaking at 86 per cent in July and products, vegetables, spices, and fruits. Full cycle 2012, while the slump phase share surpassed 91 per durations show that PP cycles across various food sub- cent in May 2017 and June 2025. groups exceed the duration of TT cycles. Duration and Amplitude of Cycles Overall, the nature of food price cycles shows that Booms last an average of 18 months while slumps downturns typically surpass upswings in terms of persist for 21 months (Chart II.1.2a). Factors such as duration, but the amplitudes are greater for upward vis- productivity gains that lead to increased supply over à-vis downward movements. For most food sub-groups, time, which in turn results in sustained low inflation downturns persist longer than upturns, barring pulses could contribute to larger duration of slumps (World and products, fruits, spices and vegetables, which record Chart II.1.1a. CPI Food and Beverages Inflation Chart II.1.1b. Weighted Share of Sub-groups (Y-o-y, per cent) in Booms and Slumps 20 15 10 5 0 - 0.2 -5 Inflation Peaks Troughs Note: Data is from January 2012 to June 2025. Sample includes 12 CPI Food subgroups. Sources: NSO; and RBI staff estimates. (Contd.) 1199 21-naJ 31-naJ 41-naJ 51-naJ 61-naJ 71-naJ 81-naJ 91-naJ 02-naJ 12-naJ 22-naJ 32-naJ 42-naJ 52-naJ 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 21-naJ 31-naJ 41-naJ 51-naJ 61-naJ 71-naJ 81-naJ 91-naJ 02-naJ 12-naJ 22-naJ 32-naJ 42-naJ 52-naJ Booms SlumpsMonetary Policy Report October 2025 Chart II.1.2a. Duration of Phases and Full Cycles Chart II.1.2b. Amplitude of Phases and Full Cycles (Months) (Per cent) 60 30 50 25 40 20 30 15 20 10 10 5 18 21 40 40 17 9 16 17 0 0 Booms Slumps Booms Slumps Peak-to-peak Trough-to-trough Peak-to-peak Trough-to-trough Note: Black whiskers indicate interquartile range. Sources: NSO; and RBI staff estimates. prolonged boom phases. Boom amplitudes consistently G. Bry and C. Boschan, 7-63. Cambridge, MA: National exceed slumps across all sub-groups. Intensity of Bureau of Economic Research. price fluctuations across various sub-groups could be Cashin, P., McDermott, C. J. and Scott, A. 2002. Booms driven by divergent factors viz., weather patterns for and Slumps in World Commodity Prices. Journal of vegetables, temperature variations for eggs and poultry Development Economics, 69 (1):277-96. and global price cycles for edible oils, and pulses where Sehkar, C.S.C., D. Roy, and Y. Bhatt. 2018. Food Inflation our import dependency is high. and Volatility in India: Trends and Determinants. References Indian Economic Review, 53 (1/2): 65-91. Bry, G. and Boschan, C. 1971. Programmed Selection World Bank (2025). Post Pandemic Commodity Cycles, A of Cyclical Turning Points. In Cyclical Analysis of Time New Era? Special Focus, Commodity Markets Outlook, Series: Selected Procedures and Computer Programs, April. At the sub-group level, vegetables, pulses and cereals record high fresh arrivals in wholesale markets for witnessed a sharp moderation in inflation (Chart II.6). short-duration crops, bolstered by favourable weather Vegetables sub-group9 exhibited an unusually muted conditions, such as a less intense summer, further and delayed summer season uptick in prices, not just contributed to the precipitous decline in vegetables inflation (Chart II.7b). confined to TOP (tomatoes, onions and potatoes), but also other vegetables, resulting in a y-o-y deflation of Among key vegetables, viz., TOP11, prices were (-) 15.9 per cent in August (Chart II.7a). Robust domestic significantly lower during April-August 2025 production in 2024-2510 of longer-duration crops and as compared with a year ago.12 Fewer weather 9 Vegetables sub-group has a weight of 6.0 per cent in the overall CPI and 13.2 per cent in the food and beverages group. 10 6.0 per cent higher for vegetables, over 2023-24, as per Second Advance Estimates (AE). 11 Tomato, onion and potato together constitute 36.5 per cent of CPI vegetables index. 12 Tomato, onion and potato prices were 21.5 per cent, 24.6 per cent and 27.3 per cent lower, respectively, during April-August 2025 as compared with the corresponding period of the previous year. 20Chapter II Prices and Costs disruptions led to steady availability of tomatoes vegetables in 2025-26 so far was also lower in wholesale markets.13 The price build-up among in comparison to last two years (Chart II.7c). Chart II.7: CPI Vegetables Inflation a. Drivers b. Market Arrivals of Vegetables* (Percentage points) (Million metric tonnes) 50 30 10 -10 -30 -15.9 c. Price Build-up d. Volatility (Standard Deviation) (Per cent) (Per cent) Notes: 1. *: Data pertain to cumulative arrivals during April-August for each year. 2. Other vegetables include beans, brinjal, cabbage, carrot, cauliflower, dhania, garlic, ginger, gourd, green chillies, okra, lemon, parwal, peas and spinach. 3. Figures in parentheses indicate items' weights in CPI-Vegetables sub-group. Sources: NSO; Agmarknet; and RBI staff estimates. 13 Although there are reports of crop losses on account of flash floods in many producing areas such as Himachal Pradesh, daily data on retail prices from Department of Consumer Affairs (DCA) is yet to show any significant pick-up in prices in September. 2211 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 52-rpA 52-nuJ 52-guA 25 23 60 20 40 15 20 10 0 5 -20 0 -40 Potato (16.3) Onion (10.7) Tomato (9.5) Other vegetables (63.5) Potato Onion Tomato Other vegetables Vegetables (y-o-y, per cent) All vegetables (y-o-y, per cent; right scale) All vegetables 20 19.0 16 12 10.0 11.3 8 6.5 5.7 6.1 4 4.0 2.7 3.3 3.9 4.6 3.6 0 Average 2023 2024 2025 2015-22 (Apr-Aug) (Apr-Aug) (Apr-Aug) (Apr-Aug) Vegetables TOP Non-TOP 4102 5102 6102 7102 8102 9102 0202 1202 2202 3202 4202 5202 60 50 40 30 20 10 19.4 0 -10 rpA yaM nuJ luJ guA peS tcO voN ceD naJ beF raM Chart II.6: Food Sub-group-level Inflation (Per cent) Food Sub-groups Jul-24 Aug-24 Sep-24 Oct-24 Nov-24 Dec-24 Jan-25 Feb-25 Mar-25 Apr-25 May-25 Jun-25 Jul-25 Aug-25 Vegetables (13.2) Pulses and Products (5.2) Cereal and Products (21.1) Fruits (6.3) Sugar and Confectionery (3.0) Egg,meat and fish (8.8) Prepared Meals (12.1) Milk and Products (14.4) Non-alcoholic Beverages (2.8) Spices (5.5) Oils and Fats (7.8) less than (-)10 per cent 0 to 4 per cent 6 to 10 per cent (-)10 to 0 per cent 4 to 6 per cent greater than 10 per cent Note: Width of each row reflects the corresponding weight in the CPI food and beverages group (given in parantheses). Sources: NSO; and RBI staff estimates. 2023-24 2024-25 2025-26 Average: 2017-18 to 2022-23Monetary Policy Report October 2025 The price volatility in vegetables sub-group and TOP Chart II.9: Cereals Inflation during April-August 2025 was also low (Chart II.7d). (Y-o-y, per cent) 16 Pulses14, the primary source of plant-based protein, was the other sub-group which recorded a double- 14 digit deflation [(-)14.5 per cent in August 2025]. 12 Pulses inflation has corrected on a sustained basis 10 from June 2024 amidst augmented availability, 8 primarily supported by government interventions 6 and imports. According to Directorate General of 4 4.3 Commercial Intelligence and Statistics, imports of 2.7 pulses scaled a record 7.3 million metric tonnes in 2 1.0 2024-25, a 54 per cent increase from a year ago. Higher 0 domestic production (4.1 per cent increase in 2024-25) and ample stocks also contributed to the moderation in Cereals and products Rice Wheat/Atta prices. Pulses prices continued to correct during 2025- Sources: NSO; and RBI staff estimates. 26 so far, contrary to the gradual pick-up witnessed during the previous years (Chart II.8). per cent in 2024-25) and high buffer stocks (3.5 times Cereals15 was the third major sub-group which the norm as on September 16, 2025), contributed to contributed to the fall in food inflation, as inflation in the moderation in inflation. Wheat inflation softened this category declined to 2.7 per cent in August 2025 from a recent high of 9.2 per cent in February 2025 (lowest since December 2021) from 7.3 per cent a year to 4.3 per cent in August, aided by record production ago (Chart II.9). Record rice production (higher by 8.2 (3.7 per cent increase in 2024-25), comfortable buffer 14 Pulses sub-group has a weight of 2.4 per cent in the CPI and 5.2 per cent in the food and beverages group. 15 Cereals sub-group has a weight of 9.7 per cent in the CPI and 21.1 per cent in the food and beverages group. 22 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 52-rpA 52-nuJ 52-guA Chart II.8: CPI Pulses and Products Inflation a. Contribution of Major Items b. Cumulative Price Build-up (Percentage points) (Per cent) 25 20 15 10 5 0 -5 -10 -15 -14.5 -20 2023-24 2025-26 2024-25 Average; 2017-18 to 2022-23 Sources: NSO; and RBI staff estimates. 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 52-rpA 52-nuJ 52-guA 25 20 16.6 15 10 5 3.0 0 -2.6 -5 -6.5 -10 Urad Tur Masur Other pulses and products Moong Pulses and products (y-o-y, per cent) Gram rpA yaM nuJ luJ guA peS tcO voN ceD naJ beF raMChapter II Prices and Costs Chart II.10: CPI Edible Oils and Fats Inflation a. Edible Oil Prices: Domestic and Global b. Drivers of CPI Oil and Fats Inflation (Y-o-y change, per cent) (Percentage points) 25 60 21.2 20 40 15 10 10.0 20 5 0 0 -5 3.9 -20 -10 -40 -15 -20 -60 Notes: 1. #: Refined oil includes sunflower, soybean, saffola etc. 2. *: Includes groundnut oil and fats (ghee, butter, vanaspati / margarine) Sources: World Bank Pink Sheet; NSO; and RBI staff estimates. stocks (1.2 times the norm as on September 16, 2025) were predominantly from coconut, as high and continued export restrictions. temperatures and unseasonal rains led to lower production. Apple prices have also hardened during While overall food inflation remained on a declining December 2024 to July 2025 (Chart II.11). trajectory, 'oils and fats' and fruits sub-groups witnessed a contrarian trend. 'Oils and fats'16 inflation rose significantly to 21.2 per cent in August 2025 (Chart II.10). This was primarily driven by an increase in international palm oil prices, partly on account of an increased bio-diesel mandate in Indonesia exacerbating global demand-supply imbalance. Despite a 10-percentage points import duty cut on crude edible oil effective from the end of May 2025, prices did not witness any major correction as supply concerns amid geopolitical escalations offset the impact. Among domestically produced oilseeds, mustard and rapeseed and coconut recorded a decline in production in 2024-2517, adding to the price pressure. Ghee and butter price inflation, however, remained relatively moderate, driven by lower inflation in milk prices. Fruits18 sub-group recorded double-digit inflation consistently since January 2025. The price pressures 16 With a weight of 3.6 per cent in the CPI and 7.8 per cent within the food and beverages group. 17 Mustard and rapeseed production declined by (-) 4.9 per cent in 2024-25 as per third AE of crop production. Coconut production declined by (-) 4.6 per cent in 2024-25 as per Second AE of horticulture production. 18 With a weight of 2.9 per cent in the CPI and 6.3 per cent within the food and beverages group. 2233 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 52-rpA 52-nuJ 52-guA 25 21.2 20 15 10 5 0 -5 -10 -15 -20 -25 CPI oils and fats Global palm oil (right scale) Global oils and meals (right scale) 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 52-rpA 52-nuJ 52-guA Mustard oil Coconut oil Refined oil# Others* Oils and fats (y-o-y, per cent) Chart II.11: Drivers of CPI Fruits Inflation (Percentage points) 20 15 11.7 10 5 0 -5 Notes: 1. #: Includes coconut, green coconut, and copra. 2. *: Includes dates, cashewnut, walnut, other nuts, raisin etc. 3. Figures in parantheses indicate items’ weights in CPI-Fruits sub-group. Sources: NSO; and RBI staff estimates. 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 52-rpA 52-nuJ 52-guA Banana (19.4) Groundnut (9.9) Mango (11.1) Coconut# (14.1) Other fruits (21.0) Other dry fruits* (8.2) Apple (16.3) Fruits (y-o-y, per cent)Monetary Policy Report October 2025 Among other food items, spices continued to remain Chart II.12: CPI Fuel Group Inflation in deflation. Animal-based protein inflation declined (Y-o-y, per cent) 15 marginally driven by lower prices of egg and meat. 10 Prepared meals and non-alcoholic beverages, on the 6.1 contrary, have registered a gradual increase in inflation 5 2.4 2.0 0 during April-August 2025 over the corresponding 2.0 -5 period of last year. -5.0 -10 CPI Fuel Group -15 CPI fuel group came out of deflation in March 2025, -20 recording a first positive print of y-o-y inflation -25 after 18 months (Chart II.12). Despite a subsequent -30 uptick in CPI fuel inflation on account of the hike in LPG prices by ₹50 per cylinder effective April 8, 2025, inflation remained in the range of 2.4-2.9 per cent during April-August 2025. Kerosene group largely remained in deflation, reflecting subdued international prices. Subsidised kerosene prices in metro cities were lowered thrice during April-June but were hiked again in July and August (Chart II.13). In May 2025, electricity tariff announcements by a number of states led to a spike in the electricity index. On a y-o-y basis, however, it moderated from 5.4 per cent in March to 2.0 per cent in August 2025 as the magnitude of increases were lower than that in the previous year. 24 32-guA 32-peS 32-tcO 32-voN 32-ceD 42-naJ 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guA Electricity (33.0) LPG (excl. conveyance) (18.8) Kerosene (8.0) Other fuel (36.7) CPI fuel and light Note: Figures in parentheses indicate item's weights in CPI-fuel group. Sources: NSO; and RBI staff estimates. Core CPI (CPI excluding Food and Fuel) Core inflation (CPI excluding food and fuel) during April-August 2025 averaged 4.2 per cent, higher than 3.2 per cent recorded a year ago. In terms of monthly trajectory, it edged up to 4.2-4.4 per cent in April-June 2025 from 4.1 per cent in March, before moderating to 4.1-4.2 per cent in July-August. A major driver of core inflation this year has been the 80 70 60 50 48.1 44.3 40 30 Kerosene - International Kerosene - Domestic (subsidised) LPG - International LPG - Domestic Notes: 1. The international price for LPG is based on spot prices for Saudi Butane and Propane, combined in the ratio of 60:40 respectively. These international product prices are indicative import prices. Further details are available at www.ppac.org.in. 2. The indicative international price for kerosene is the Singapore Jet Kero spot price. 3. The domestic prices of LPG and kerosene represent the average prices of four and three metros, respectively, as reported by Indian Oil Corporation Limited (IOCL). Sources: Bloomberg; IOCL; and RBI staff estimates. 32-peS 32-voN 42-naJ 42-raM 42-yaM 42-luJ 42-peS 42-voN 52-naJ 52-raM 52-yaM 52-luJ 52-peS 1200 1000 863.3 800 600 629.1 400 32-peS 32-voN 42-naJ 42-raM 42-yaM 42-luJ 42-peS 42-voN 52-naJ 52-raM 52-yaM 52-luJ 52-peS Chart II.13: Domestic and International Fuel Prices a. Kerosene b. LPG (₹ per litre) (₹ per 14.2 kg cylinder)Chapter II Prices and Costs rise in gold prices, which is part of the 'personal care Chart II.15: CPI Inflation excluding Food and effects' sub-group. Between March and August and Fuel: Persistence 2025, gold prices rose by 14.7 per cent pushing its [In(cid:28)lation (y-o-y, per cent), x-axis; cross-sectional standard deviation, y-axis] contribution to core inflation to 117 bps in August. 18 Rise in international gold prices, driven by heightened 16 global economic and geopolitical uncertainty that 14 encouraged safe haven buying and sustained demand 12 for gold as a financial asset by central banks and 10 investors, drove domestic price increases. Housing, 8 health, and transport and communication remained 6 the other major contributors to core inflation 4 (Chart II.14). 2 0 Although core inflation during April-August 2025 2.0 3.0 4.0 5.0 6.0 7.0 8.0 was higher than a year ago, its volatility remained 2020-21 (Jun-Feb) 2021-22 (Jun-Mar) 2022-23 (Apr-Mar) comparable to last year. Both the level and variability 2023-24 (Apr-Mar) 2024-25 (Apr-Mar) 2025-26 (Apr-Aug) of core inflation, however, remained below those seen Note: Each dot represents a month, plotting the y-o-y inflation level (x-axis) against the cross-sectional standard deviation across all items (y-axis). Dots with in the immediate post-COVID years (Chart II.15). Other the same colour correspond to months within the same financial year. Sources: NSO; and RBI staff estimates. exclusion-based measures of underlying inflation, which exclude items such as petrol, diesel, gold and to 3.1 per cent in August, 103 bps below conventional silver in addition to food and fuel recorded a similar core inflation (i.e., excluding food and fuel). trajectory (Table II.2). Inflation in CPI excluding food, Decomposing CPI inflation excluding food, fuel, fuel, petrol, diesel, gold and silver components eased petrol, diesel, gold, and silver into its goods and services components19 shows that goods inflation Chart II.14: Contribution to CPI Core Inflation (Percentage points) Table II.2: Exclusion-based Measures of Inflation CPI excluding food fuel (y-o-y, per cent) (y-o-y, per cent) 4.2 of which Period CPI excluding CPI excluding CPI excluding food Transport and communication (18.2) 0.5 food and fuel food fuel petrol fuel petrol diesel (47.3) diesel (45.0) gold silver (43.8) Health (12.5) 0.6 Aug-24 3.3 3.5 3.0 Clothing and footwear (13.8) 0.4 Sep-24 3.5 3.8 3.2 Housing (21.3) 0.7 Oct-24 3.8 4.0 3.3 Household goods and services (8.0) 0.2 Nov-24 3.7 3.9 3.3 Personal care and effects (8.2) Dec-24 3.6 3.9 3.3 1.3 Jan-25 3.6 3.9 3.2 Education (9.4) 0.4 Feb-25 4.1 4.3 3.4 Others* (8.6) 0.2 Mar-25 4.1 4.3 3.3 Core goods (51.3) 2.4 Apr-25 4.2 4.4 3.5 Core services (48.7) May-25 4.2 4.3 3.4 1.8 Jun-25 4.4 4.6 3.5 Average: 2017-18 to 2019-20 2024-25 2025-26 (Apr-Aug) Jul-25 4.1 4.2 3.2 Notes: 1. Figures in parentheses indicate weights in CPI excluding food and fuel. Aug-25 4.2 4.3 3.1 2. *: Includes Pan, tobacco and intoxicants; and Recreation and Notes: 1. Figures in parentheses indicate weights in CPI. amusement. Sources: NSO; and RBI staff estimates. 2. Derived as a residual from headline CPI. Sources: NSO; and RBI staff estimates. 19 Goods component in CPI excluding food, fuel, petrol, diesel, gold and silver has a weight of 20.7 per cent in the headline CPI and that of services component is 23.0 per cent. 2255Monetary Policy Report October 2025 Chart II.16: Contributions to CPI Inflation excluding Food, Fuel, Petrol, Diesel, Gold, and Silver a. Goods b. Services (Percentage points) (Percentage points) 6 5 4 3 2.9 2 1 0 -1 Personal care and effects Health Recreation and amusement Transport and communication Clothing and footwear Education Household goods and services Pan, tobacco and intoxicants Goods inflation (y-o-y, per cent) [20.7] Notes: 1. Figures in parentheses indicate weights in CPI. 2. *: Represents balancing item to reconcile divergence in CPI index between CPI items indices aggregated vertically, across items and the published sub-group/group/overall CPI index. Sources: NSO; and RBI staff estimates. remained steady around 2.9 per cent for the last one year while services inflation recorded a gradual uptick till June. However, there was a sharp decline in the services inflation from 4.1 per cent in June to 3.3 per cent in August driven by a huge favourable base effect which was most prominent in the transport and communication sub-group on account of the mobile tariff hike of July 2024. Core services inflation was at 3.3 per cent in August 2025 (Chart II.16). II.3 Decoding the Inflation Dynamics Statistical Properties Statistical properties of inflation provide insights into the nature of inflation dynamics, both in terms of the trajectory and underlying changes in trend. The distribution of CPI inflation in 2025 so far (January-August 2025) vis-à-vis 2024 indicates a relatively milder positive skew, reflecting a broad- based easing of price pressures. The distribution also 26 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 52-rpA 52-nuJ 52-guA 6 5 4 3.3 3 2 1 0 -1 Transport and communication Housing Personal care and effects Health Recreation and amusement Clothing and footwear Household goods and services Education Services inflation (y-o-y, per cent) [23.0] Others* 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 52-rpA 52-nuJ 52-guA recorded a narrowing in width, suggesting reduced inflation volatility among sub-groups (Chart II.17). In terms of monthly trajectory, the decline in inflationary pressures since April has been accompanied by a widening of the inflation divergence across quantiles (Chart II.18). The widening of inflation divergence across CPI sub-groups highlights the role of a few sub-groups in driving headline numbers to ultra-low levels. Other measures of underlying inflation such as the trimmed mean measures and the weighted median20 remained at a much lower level than CPI excluding food and fuel inflation (Table II.3). In terms of trajectory, they remain largely aligned with the conventional core inflation. Diffusion indices21 generally moderated during 2025- 26 so far except in July and August, indicating that the number of items within CPI experiencing price 20 While exclusion-based measures drop a fixed set of volatile items (for example, food and fuel) in each period, trimmed measures exclude items located in the tails of the inflation distribution - items displaying changes more than the specified threshold in prices each month are excluded, and the items dropped differ from month to month. The weighted median inflation rate is defined as the inflation rate corresponding to the item that lies at the 50th percentile in the distribution of price changes within the CPI basket, weighted using CPI weights. 21 The CPI diffusion index, a measure of dispersion of price changes, categorises items in the CPI basket according to whether their m-o-m seasonally adjusted prices have risen, remained stagnant or fallen over the previous month. The higher the reading above 50, the broader is the expansion or generalisation of price increases; the further is the reading below 50, the broader is the price decline across items.Chapter II Prices and Costs Chart II.18: CPI Sub-Group/ Group Inflation Range (y-o-y, per cent) 12 10 8 6 4 2 2.1 0 -2 10th to 90th percentile CPI headline Target Sources: NSO; and RBI staff estimates. pressures are also on the decline across both goods and services components (Chart II.19a). This is also corroborated by the low share of items with high inflation (above 6 per cent) in the CPI basket, which in 22 The CPI weighting diagrams use the modified mixed reference period (MMRP) data based on the 2011-12 Consumer Expenditure Survey conducted by the National Sample Survey Office. Under MMRP, data are collected on expenditure incurred during the last seven days for frequently purchased items like edible oil, eggs, fish, meat, vegetables, fruits, spices, beverages, processed foods, pan, tobacco and intoxicants; expenditure incurred during the last 365 days for items like clothing, bedding, footwear, education, medical (institutional), durable goods; and expenditure incurred in the last 30 days for all other food, fuel and light, miscellaneous goods and services including non-institutional medical services, rents and taxes. 2277 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 52-rpA 52-nuJ 52-guA Chart II.17: Average CPI Inflation (y-o-y) (Kernel Density Estimates) 0.16 0.14 0.12 0.10 0.08 0.06 0.04 0.02 0.00 -20 -10 0 10 20 30 Inflation (per cent) 2017 to 2019 (Jan-Aug) 2024 (Jan-Aug) 2025 (Jan-Aug) Note: Kernel density estimation is a statistical technique that creates a smooth estimate of a probability density function from a dataset by summing up localized kernel functions centered on each data point. Sources: NSO; and RBI staff estimates. August stood at 15.5 per cent, the lowest since August 2017 (Chart II.19b). Inflation across goods and services Another measure to gauge the underlying inflation Table II.3: Measures of Underlying Inflation: dynamics is to classify the products across goods Trimmed Mean Measures and Weighted Median (both perishable and non-perishable) and services22. (y-o-y, per cent) Goods (with a weight of 76.6 per cent in the overall Month 5% 10% 25% Weighted CPI) contributed to around 70 per cent of headline trimmed trimmed trimmed Median inflation between March and May 2025 but their Aug-24 3.9 3.7 3.3 3.0 Sep-24 4.4 3.9 3.5 3.0 contribution dropped to around 53 per cent in June Oct-24 4.6 4.1 3.5 3.0 and July 2025. The negative contribution of perishable Nov-24 4.6 4.1 3.5 3.2 items, including vegetables, spices, fruits and other Dec-24 4.5 4.1 3.5 3.1 food items such as milk, meat and fish and prepared Jan-25 4.1 3.7 3.4 2.9 Feb-25 3.7 3.5 3.3 2.9 meals, drove this moderation. The contribution of Mar-25 3.6 3.4 3.2 2.9 semi-perishables consisting of cereals, pulses, and Apr-25 3.3 3.4 3.3 3.0 personal care to overall inflation remained broadly May-25 3.1 3.3 3.3 3.2 stable till July, while that of durables rose, primarily Jun-25 2.8 3.1 3.1 3.1 Jul-25 2.7 3.0 3.1 3.0 reflecting the surge in gold prices. The trends, Aug-25 2.9 2.9 2.9 2.9 however, reversed in August 2025 with contribution Sources: NSO; and RBI staff estimates. of goods inflation (driven by perishables) climbingMonetary Policy Report October 2025 Chart II.19: CPI Diffusion Indices (M-o-M Seasonally Adjusted) a: CPI Headline, Goods and Services b. Cumulative Weight of Items Across (Index) Inflation Ranges 100 (Per cent) 91.8 90 80 74.7 70 69.5 60 50 40 30 20 10 0 CPI headline CPI goods CPI services Sources: NSO; and RBI staff estimates. up to 62.5 per cent of headline inflation, even as the contribution of semi-perishables and durables came down. Meanwhile, services (with a weight of 23.4 per cent) saw their contribution increase from around 26 per cent in March to 48 per cent in July, before moderating to 37.5 per cent in August (Chart II.20). 28 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 52-rpA 52-nuJ 52-guA 100 90 80 70 60 50 40 30 20 10 0 <2 per cent 2-4 per cent 4-6 per cent >6 per cent 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 52-rpA 52-nuJ 52-guA Chart II.20: Contribution of Goods and Services (Percentage points) 8 7 6 5 4 3 2 2.1 0.7 1 0.8 0.4 0 0.2 -1 Non-durable 7 days recall (34.8) Services (23.4) Non-durable 30 days recall (31.3) Durable (10.5) CPI headline inflation (y-o-y, per cent) Others* Notes: 1. Figures in parentheses indicate weights in CPI. 2. *: Represents balancing item to reconcile divergence in CPI between CPI items indices aggregated vertically, across items and the published sub-group/group/overall CPI. Sources: NSO; and RBI staff estimates. 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 52-rpA 52-nuJ 52-guA Regional Trends in Inflation Turning to inflation trajectory across regions, both urban and rural areas have been experiencing a sustained easing since October 2024. The higher weight of food in the rural CPI basket, coupled with a larger magnitude of decline in food inflation, resulted in rural inflation remaining below urban levels since March 2025 (Chart II.21). There was a marked decline in the number of states witnessing high inflation during April–August 2025 as compared with the corresponding period of last year. 30 out of the 36 States/UTs recorded inflation below 4 per cent during this period (Table II.4). One state, Kerala, where headline inflation has risen sharply in recent months, devotes a larger share of their consumption basket to coconut and coconut oil23, prices of which have increased meteorically.24 II.4 Drivers of Inflation Trajectory While the disaggregated analysis provides a commodity level understanding of inflation dynamics, the drill down into factors that condition the overall inflation 23 As per the Household Consumption Expenditure Survey 2011-12 (basis of current CPI 2012=100), adjusted for differences in state-level Monthly per Capita Expenditure (MPCE) relative to the All-India MPCE, coconut consumption in Kerala is about 6 times more than the all-India consumption, whereas coconut oil consumption in Kerala is about 16 times more than the all-India consumption. 24 Coconut and coconut oil recorded an average inflation of 52.0 per cent and 102.1 per cent during April-August 2025.Chapter II Prices and Costs Chart II.21: CPI Headline Inflation: Urban and Rural Table II.4: Distribution of Headline Inflation (Y-o-y, per cent) across States/UTs: Number of States# 8 Headline Inflation Range 2024-25 2025-26 7 (Per cent) (Apr-Aug) (Apr-Aug) Between 0 to 2.0 3 14 6 Between 2.0 to 4.0 14 16 5 Between 4.0 to 6.0 18 5 Greater than 6.0 1 1 4 Note: # Accounted for the unification of Daman and Diu with Dadra & 3 Nagar Haveli and the formation of Ladakh as a Union Territory. 2.5 Sources: NSO; and RBI staff estimates. 2 1.7 inputs, deflation is led by declining prices of diesel 1 and fertilisers. 0 Rural labour cost, reflected in nominal rural wage growth was range-bound between 6.4-6.6 per cent in Rural Urban Q1:2025-26, with agricultural wages recording a faster Sources: NSO; and RBI staff estimates. growth (Chart II.24). Growth in agricultural wages was trajectory such as imported inflation, costs, wages and broad-based across occupations with seasonal uptick other macroeconomic factors provide insights into the seen for horticultural workers, harvesting and picking underlying drivers of inflation. workers, inland fishermen, and ploughing/tilling workers. Real rural wages (deflated by CPI rural index) Imported Inflation increased at a faster rate as inflation moderated. The contribution of imported components25 to headline inflation remained modest till July 2025 on the back of moderate energy prices26, despite a sharp uptick in the global prices of gold and silver. The uptick seen in August 2025 was mainly driven by gold, silver, and edible oils (Chart II.22). Costs Input cost inflation, as measured by Wholesale Price Index (WPI) inflation in industrial raw materials and farm inputs, recorded deflation during April to August 2025 (Chart II.23). The pass-through of moderation in international commodity prices, barring that of precious metals, contributed significantly to this moderation. Among industrial inputs, aviation turbine fuel, high-speed diesel, naphtha, and furnace oil prices witnessed a decline in inflation. For farm 25 Global commodities that drive domestic prices include petroleum products; coal; electronic goods; gold; silver; chemical products; metal products; textiles; cereals; milk products, and vegetables oils – these together have a weight of 36.4 per cent in the CPI basket (adjusted weights based on pass- through from international prices is at 8.4 per cent). 26 Lower International crude petroleum, kerosene, propane and butane prices. 2299 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 52-rpA 52-nuJ 52-guA Chart II.22: Contribution of Imported Inflation to Headline Inflation (Percentage points) 10 8 6 4 2 2.1 1.3 0 0.8 -2 -4 Imported inflation Domestically generated inflation CPI headline inflation (y-o-y, per cent) Sources: NSO; and RBI staff estimates. 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 52-rpA 52-nuJ 52-guAMonetary Policy Report October 2025 Chart II.24: Wage Growth and Inflation in Rural Areas (Y-o-y, per cent) 10 9 8 7.5 7 6.6 6 5.8 5 4 3 2 1 0 CPI Rural CPI Agricultural Labourers Agricultural Labourers* Non Agricultural Labourers** CPI Rural Labourers Average Rural Wage Notes: 1. Data for CPI-Agricultural Labourers and CPI-Rural Labourers during May-July 2025 pertains to the rebased series with base 2019=100, published by Labour Bureau, Ministry of Labour & Employment on July 18, 2025. 2. *: Comprises ploughing, sowing, harvesting, picking, horticulture workers, fishermen inland, fishermen costal, loggers and wood cutters, animal husbandry, packaging, general agriculture labourers, plant protection workers. 3. **: Comprises carpenter, blacksmith, mason, weavers, beedi makers, bamboo, cane basket weavers, handicraft workers, plumbers, electrician, construction workers, light motor vehicle & tractor drivers, sweeping/cleaning workers, and other non-agricultural labourers. Sources: NSO; Labour Bureau; and RBI staff estimates. In the organised sector, staff cost growth (y-o-y) edged managers’ index (PMI) reported an expansion in input up for manufacturing sector during Q4:2024-25 and prices for August 2025. Movements in output prices Q1:2025-26 following the slump in Q3:2024-25. In the charged by manufacturing firms broadly mirrored the services sector, staff cost growth remained muted in trend in input prices (Chart II.26a). Q1:2025-26 (Chart II.25). Operating expenses of services sector reflected in PMI In terms of assessment of cost conditions, services increased in August 2025 with prices charged manufacturing firms polled for the purchasing by services firms also moving in tandem. The input- 30 32-luJ 32-peS 32-voN 42-naJ 42-raM 42-yaM 42-luJ 42-peS 42-voN 52-naJ 52-raM 52-yaM 52-luJ Chart II.23: Farm and Non-farm Input Cost Inflation (Y-o-y, per cent) 6 4 2 0.5 0 0.0 -1.3 -2 -4 -6 -10 Overall WPI Industrial raw materials* Farm inputs$ Notes: 1. *: Comprises primary non-food articles, minerals, coal, aviation turbine fuel, high speed diesel, naphtha, bitumen, furnace oil, lube oil, petroleum coke, electricity, cotton yarn and paper and pulp from WPI. 2. $: Comprises high speed diesel, fodder, electricity, fertilizers, pesticides, and agricultural and forestry machinery from WPI. 3. WPI Electricity captures unit revenue data from selected power generators. Sources: Ministry of Commerce and Industry; and RBI staff estimates. 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 52-rpA 52-nuJ 52-guA -8 Chart II.25: Staff Cost in Manufacturing and Services Sectors a. Manufacturing Sector b. Services Sector (Per cent) (Per cent) 14 5.9 6 12 10 11.0 5 8 6 5.4 4 4 2 3 0 -2 -4 2 -6 -5.2 -8 1 Base effect Staff cost growth (y-o-y) Base effect Staff cost growth (y-o-y) Quarterly momemtum Quarterly momemtum Staff cost/value of production (right scale) Staff cost/value of production (right scale) Note: Staff cost growth (y-o-y) is based on a common set of companies. Sources: Capitaline database; and RBI staff estimates. 22-12-4Q 32-22-1Q 32-22-2Q 32-22-3Q 32-22-4Q 42-32-1Q 42-32-2Q 42-32-3Q 42-32-4Q 52-42-1Q 52-42-2Q 52-42-3Q 52-42-4Q 62-52-1Q 30 40 25 35 20 26.6 30 15 9.7 25 10 20 5 4.1 15 0 -5 10 -4.1 -10 5 -15 0 22-12-4Q 32-22-1Q 32-22-2Q 32-22-3Q 32-22-4Q 42-32-1Q 42-32-2Q 42-32-3Q 42-32-4Q 52-42-1Q 52-42-2Q 52-42-3Q 52-42-4Q 62-52-1QChapter II Prices and Costs Chart II.26: PMI Input-Output Price Gap a. Manufacturing Sector b. Services Sector [Index (seasonally adjusted, 50=No change), [Index (seasonally adjusted, 50=No change), left scale; index gap, right scale] left scale; index gap, right scale] 75 5 70 4 65 3 60 2 55 54.4 1 52.7 50 0 45 -1 40 -2 35 -3 Output prices Input prices Output prices Input prices Input-output price gap (right scale) Sources: S&P Global; and RBI staff estimates. output price gap for both manufacturing and services ease in manufacturing and infrastructure sectors sector firms do not indicate any pent-up pass-through during Q3:2025-26, but pick up in the services sector (Chart II.26b). (Chart II.27a). During Q3:2025-26, input cost and On the assessment and outlook of cost conditions, as selling price pressures are expected to moderate for per the firms polled in the Reserve Bank’s enterprise the infrastructure sector whereas both are expected to surveys27, salary outgo pressures are expected to harden for the services sector (Chart II.27b and II.27c). 27 Industrial Outlook Survey; and Services and Infrastructure Outlook Survey. 3311 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 52-rpA 52-nuJ 52-guA 75 5 70 4 65 3 60 2 55.5 55 1 55.3 50 0 45 -1 40 -2 35 -3 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 52-rpA 52-nuJ 52-guA Input-output price gap (right scale) Chart II.27: Expectations of Cost and Price Conditions a. Salary Outgo b. Cost of Inputs c. Selling Prices (Net response, per cent) (Net response, per cent) (Net response, per cent) Note: ‘Net response’ is the difference between the percentage of respondents reporting an increase in prices and those reporting decrease. Sources: Reserve Bank’s Industrial Outlook Survey; Services & Infrastructure Outlook survey; and RBI staff estimates. noisnapxE noitcartnoC 90 80 70 60 50 50.8 40 46.2 30 29.9 20 10 0 -10 -20 Manufacturing firms Services firms Infrastructure firms 22-1202:4Q 32-2202:1Q 32-2202:2Q 32-2202:3Q 32-2202:4Q 42-3202:1Q 42-3202:2Q 42-3202:3Q 42-3202:4Q 52-4202:1Q 52-4202:2Q 52-4202:3Q 52-4202:4Q 62-5202:1Q 62-5202:2Q 62-5202:3Q 90 80 70 60 57.8 53.5 50 40 45.6 30 20 10 0 -10 -20 22-1202:4Q 32-2202:1Q 32-2202:2Q 32-2202:3Q 32-2202:4Q 42-3202:1Q 42-3202:2Q 42-3202:3Q 42-3202:4Q 52-4202:1Q 52-4202:2Q 52-4202:3Q 52-4202:4Q 62-5202:1Q 62-5202:2Q 62-5202:3Q 90 80 70 60 50 45.8 40 43.6 30 24.1 20 10 0 -10 -20 22-1202:4Q 32-2202:1Q 32-2202:2Q 32-2202:3Q 32-2202:4Q 42-3202:1Q 42-3202:2Q 42-3202:3Q 42-3202:4Q 52-4202:1Q 52-4202:2Q 52-4202:3Q 52-4202:4Q 62-5202:1Q 62-5202:2Q 62-5202:3QMonetary Policy Report October 2025 Margins 2025, aimed at simplifying tax rates and lowering The absolute retail price margins28 remained steady in prices for the final consumer. A mapping of changes case of select cereals (rice, wheat and atta), pulses and in GST rates to the CPI shows that about 11.4 per cent edible oils, during April-September 2025 (Chart II.28). of the CPI basket would be impacted by the recent The stable retail price margins of edible oils post changes, with the magnitude varying significantly import-tariff duty reduction in May 2025 indicate across product groups (Table II.5). The overall impact that there is no pent-up price transmission post the of GST changes on CPI inflation would be conditional duty reduction with domestic prices firming up in on the extent of the pass-through which is likely to both wholesale and retail markets. Retail margins remain partial on account of offsetting changes in decreased in TOP vegetables in September 2025 after input tax credit and compensation cess, as well as some increase seen during July-August 2025.29 various forms of price rigidities. GST Rationalisation Overall, the historical decomposition of inflation The Government has implemented GST rate using a VAR30 model indicates that the moderation in rationalisation measures effective September 22, inflation witnessed during Q4:2024-25 to Q2:2025-26 Chart II.28: Retail, Wholesale Prices, and Margins a. Cereals b. Pulses [Price, left scale; Margin, right scale [Price, left scale; Margin, right scale (₹ per kilogram)] (₹ per kilogram)] 45 6 42 40.8 39 36.3 5 36 33 4 30 27 3 24 21 2 18 15 1 Retail price Wholesale price Retail price Wholesale price Retail price margin (right scale) Retail price margin (right scale) c. Vegetables d. Edible Oils [Price, left scale; Margin, right scale [Price, left scale; Margin, right scale (₹ per kilogram)] (₹ per kilogram)] Retail price Wholesale price Retail price Wholesale price Retail price margin (right scale) Retail price margin (right scale) Sources: Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution; and RBI staff estimates. 28 Defined as the difference between retail and wholesale prices based on the data collected by DCA. 29 September month price margins are calculated based on daily wholesale and retail price data till September 24, 2025. 30 Historical decomposition estimates the contribution of each shock to the movements in inflation over the sample period (Q4:2010-11 to Q2:2025-26) based on a VAR with the following variables (represented as the vector Y ) – crude oil prices (US$ per barrel); exchange rate (INR per US$), asset price (BSE t Sensex), CPI; the output gap; rural wages; the policy repo rate; and money supply (M3). All variables other than policy repo rate are y-o-y growth rates. The VAR can be written in reduced form as: Y = c + A Y + e ; where e represents a vector of shocks. Using Wold decomposition, Y can be represented as t t–1 t t t a function of its deterministic trend and sum of all the shocks e. t 32 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 52-rpA 52-nuJ 52-guA 50 12 40 10 30.5 30 23.8 8 20 6 10 4 0 2 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 52-rpA 52-nuJ 52-guA 200 12 180 175.3 11 165.1 160 10 140 9 120 8 100 7 80 6 60 5 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 52-rpA 52-nuJ 52-guA 140 16 120 107.5 14 12 100 98.3 10 80 8 60 6 40 4 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 52-rpA 52-nuJ 52-guAChapter II Prices and Costs Table II.5: GST Slabs mapped to item-level CPI^ Major Items GST 1.0 Rate GST 2.0 Rate Difference CPI Weight (per cent) (per cent) (percentage points) (per cent) Primary food articles (Cereals, Pulses, Vegetables, Fresh Fruits, Raw Milk, etc.) 0 0 0 61.3 Gold and Silver 3 3 0 1.2 Clothing and Footwear (less than `1000), Fuel (LPG, kerosene), some household items 5 5 0 18.9 Electrical fittings, small electronic items, washing soap, private tuition fees, etc. 18 18 0 6.1 Coal 5 18 0* 0.04 Demerit goods like pan, tobacco, intoxicants 28 40 0$ 1.1 Stationery items like notebooks, exercise books, pencils, etc. 12 0 -12 0.4 Milk products, Dry fruits, Utensils, Medicines, Sugar, Clothing and Footwear 12 5 -7 4.6 (between `1000 and `2500), etc. FMCG items: biscuits, soaps, shampoo, shaving kits, etc. 18 5 -13 3.5 White goods like AC, refrigerator, etc. 28 18 -10 2.2 Packaged cooked meal 5 0 -5 0.7 Decreased (Weight in CPI) 11.4 No change (Weight in CPI) 88.6 Notes: 1. ^: Weights are adjusted for assumed proportion of pre-packaged and labelled price quotations collected by NSO for an item under CPI basket. 2. *: Coal attracted, prior to rate rationalization, 5% GST+ Compensation cess of Rs 400/ton. The GST Council has recommended to end compensation cess and hence the rate has been merged with GST. There is no additional tax burden. 3. $: For cigarettes, chewing tobacco products etc. (excluding bidi, where the GST rate was cut), the existing rates of GST and compensation cess will continue to apply, and the new rates will be implemented at a later date to be notified, based on discharging of entire loan and interest liabilities on account of compensation cess. Hence, for these goods, rates are taken as unchanged. Sources: Goods and Services Tax Council; NSO; and RBI staff estimates. Chart II.29: Decomposition of CPI Inflation* (Percentage points) 5 8 4 7 3 6 2 1 5 0 4 -1 3 -2 2 -3 -4 1 -5 0 Fuel price shock Exchange rate shock Policy rate shock Asset price shock Supply shock Output gap shock Wage shock Money supply shock Inflation (right scale, per cent) 3333 42-3202:1Q 42-3202:2Q 42-3202:3Q 42-3202:4Q 52-4202:1Q 52-4202:2Q 52-4202:3Q 52-4202:4Q 62-5202:1Q 62-5202:2Q was primarily on account of favourable supply shocks than anticipated moderation in food prices. The (Chart II.29). moderation in inflation has also turned out to be more generalised with core inflation remaining II.5 Conclusion largely rangebound despite pressure exerted by sharp Headline inflation declined significantly during increases in gold prices. Going forward, the progress FY2025-26 (April-August), driven by a faster of southwest monsoon, higher kharif crop sowing as well as record reservoir levels, which could help the rabi sowing are all pointing towards a benign food price scenario. Recent reduction in GST rates could further aid in keeping overall inflation low and below the target during 2025-26, on an average basis. CPI inflation, however, is likely to edge up, especially during Q4:2025-26, as unfavourable base effects kick in, and demand side stimulus from policy easing come into play. Although benign inflation conditions are expected to prevail in the near-term, uncertainties emanating from unexpected weather shocks as well as international * Deviation from deterministic trend. commodity prices continue to pose major risks to the Note: Estimated using a vector autoregression (see footnote 30 for details). Q2:2025-26 pertains to July-August 2025. inflation trajectory. Sources: NSO; RBI; Petroleum Planning & Analysis Cell (PPAC); BSE; Labour Bureau; and RBI staff estimates.Monetary Policy Report October 2025 III. Demand and Output Domestic economic activity remained buoyant in H1:2025-26, driven by strong private consumption and robust investment. External demand continues to face headwinds from global trade uncertainties and US tariffs. Manufacturing activity gained strength, while the services sector sustained its momentum. Structural reforms, including GST 2.0, are expected to support momentum in domestic demand and output. Domestic economic activity exhibited resilience III.1 Aggregate Demand in H1:2025-26, with accelerated real GDP growth Aggregate demand conditions improved further as in Q1. Aggregate demand continued to be strong, reflected in the growth of real gross domestic product underpinned by buoyant private consumption and (GDP) at 7.8 per cent year-on-year (y-o-y) in Q1:2025- strengthening investment activity. Government 26 as compared to 7.4 per cent in the previous quarter. consumption also held up well. Net external demand, This was driven by buoyant private consumption, however, remained weak and acted as a drag on government consumption and fixed investment – aggregate demand. On the supply side, manufacturing all three components posted growth of 7 per cent or activity gained further steam, while the services above– while net exports acted as a drag on aggregate sector held its momentum. Agricultural activity demand (Table III.1 and Chart III.1). The momentum also expanded at a healthy pace. Going forward, the of GDP – quarter-on-quarter (q-o-q) seasonally adjusted high US tariffs, unless resolved, could reduce India’s annualised growth rate (SAAR) – was placed at 6.7 per merchandise exports to the largest export destination, cent (Chart III.1b). adversely impacting net external demand. The recent GDP Projections versus Actual Outcomes structural reforms, including the implementation of GST 2.0, are expected to boost domestic demand and The actual growth for Q1:2025-26 turned out to be output, which may mitigate the adverse impact of US higher than projected in the Monetary Policy Report tariffs. The protracted geopolitical tensions, rising (MPR) of April 2025 (Chart III.2). This was mainly on geoeconomic fragmentations and global financial account of a stronger than anticipated performance market volatility continue to pose downside risk to of private consumption and government final the growth outlook. consumption expenditure. Table III.1: Real GDP Growth (Y-o-y, per cent)^ Item 2023-24 2024-25 Weighted Contribution* 2024-25 2025-26 (FRE) (PE) 2023-24 2024-25 Q1 Q2 Q3 Q4 Q1 Private final consumption expenditure 5.6 7.2 3.2 4.0 8.3 6.4 8.1 6.0 7.0 Government final consumption 8.1 2.3 0.8 0.2 -0.3 4.3 9.3 -1.8 7.4 expenditure Gross fixed capital formation 8.8 7.1 3.0 2.4 6.7 6.7 5.2 9.4 7.8 Exports 2.2 6.3 0.5 1.4 8.3 3.0 10.8 3.9 6.3 Imports 13.8 -3.7 3.3 -0.9 -1.6 1.0 -2.1 -12.7 10.9 GDP at market prices 9.2 6.5 9.2 6.5 6.5 5.6 6.4 7.4 7.8 Note: *: Component-wise contributions to growth do not add up to GDP growth because change in stocks, valuables and discrepancies are not included. ^: Unless specified otherwise, all discussions on growth rates in this chapter are on year-on-year (y-o-y) basis. FRE: First revised estimates; PE: Provisional estimates. Sources: National Statistical Office (NSO); and RBI staff estimates. 34Chapter III Demand and Output Chart III.1: GDP Growth and its Constituents a. Weighted Contribution of the Components b. GDP Growth and Momentum to GDP Growth (Y-o-y growth in per cent) 16 (Percentage points) 18 12 12 7.8 7.8 8 6 6.7 4 0 0 -6 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 -4 2022-23 2023-24 2024-25 2025 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 -26 PFCE GFCE 2022-23 2023-24 2024-25 2025 GFCF Net exports -26 GDP (y-o-y, per cent) y-o-y growth q-o-q SAAR Notes: PFCE: Private final consumption expenditure; GFCE: Government final consumption expenditure; GFCF: Gross fixed capital formation; SAAR – Seasonally adjusted annualised rate. Sources: NSO; and RBI staff estimates. III.1.1 Private Final Consumption Expenditure conditions are supporting discretionary spending and private consumption. Private final consumption expenditure – the mainstay of aggregate demand – rebounded and grew by 7.0 Latest high frequency indicators (HFIs) show some per cent (y-o-y), contributing 4.0 percentage points to signs of improvement in urban demand in Q2:2025-26 overall GDP growth in Q1:2025-26. The strong growth (Table III.2). The consumer durables output expanded in private consumption in Q1 indicates revival in the at a strong pace in July 2025, while the sales of fast- discretionary spending of households. The decline in moving consumer goods in urban areas improved interest rates, lower inflation and steady employment during July-August. Passenger vehicle sales posted positive growth in July 2025 but turned negative in Chart III.2: GDP Growth - Projection versus Actual (Y-o-y growth in per cent) August. Growth in bank credit to households (personal 8.0 7.8 loans) remained robust during July-August, despite 6.5 moderating from the last year’s levels. Domestic air 6.0 passenger traffic contracted during July-August, partly on account of monsoon rains. 4.0 As per the latest round of the Reserve Bank’s Consumer Confidence Survey, households are optimistic about their one-year-ahead economic conditions, and the 2.0 consumer confidence also recorded improvement in September 2025. Consumer expectations, shaped by 0.0 Q1:2025-26 the stance of monetary policy and the signals conveyed April 2025 MPR Projection Actual by key macroeconomic indicators, are also indicating Sources: NSO; and RBI staff estimates. improvement in private consumption (Box.III.1). 3355Monetary Policy Report October 2025 Table III.2: Indicators of Consumption (Y-o-y, per cent) Indicators 2023-24 2024-25 2025-26 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Jul Aug Urban demand Domestic air passenger traffic 19.1 23.0 9.1 5.2 5.6 7.3 11.4 12.0 5.3 -2.5 -0.5 Passenger vehicle sales 9.6 5.8 8.6 10.8 20.2 -1.3 5.1 3.6 -1.4 1.5# -9.0# IIP: Consumer durables -2.7 1.1 5.3 11.2 10.7 6.6 9.0 5.9 2.6 7.7 Personal loans 21.3 30.0 28.4 27.5 25.6 13.4 12.0 11.6 12.1 11.9 Vehicle loans 19.3 21.2 16.4 14.2 15.5 13.3 8.8 8.6 10.8 8.9 Credit card outstanding 37.6 31.4 32.6 25.6 23.3 18.0 15.6 10.6 7.2 5.6 Rural demand Tractor sales -1.9 -5.8 -4.9 -18.9 0.5 0.7 13.5 17.3 9.2 8.0 28.3 Motorcycle sales 13.8 -2.9 22.1 27.0 16.8 10.2 -1.9 -3.5 -9.2 4.7 4.3 IIP: Consumer non-durables 6.8 7.0 2.5 0.7 -0.2 -2.2 -1.6 -2.0 -1.5 0.5 Fertiliser sales -2.9 6.0 2.4 -5.3 2.4 -7.3 0.4 -9.6 -14.7 MGNREGA work demand 4.4 15.1 1.3 -8.3 -16.1 -16.6 1.7 6.5 1.3 -12.3 -26.1 FMCG sales Rural 5.7 9.1 8.3 8.4 8.5 8.2 Urban 1.9 4.0 2.4 4.1 3.9 4.3 All India 3.5 6.2 4.9 5.9 5.8 5.9 #: Doesn’t include Tata Motors. Sources: Directorate General of Civil Aviation (DGCA), Society of Indian Automobile Manufacturers (SIAM); NSO; RBI; Tractor and Mechanization Association (TMA); Ministry of Chemicals and Fertilisers (MoC&F); Ministery of Rural Development (MoRD); NielsenIQ’s Retail Audit Service; and RBI staff estimates. Box III.1: Consumer Confidence Channel: The Perception Pathway in Policy Transmission to Private Consumption Private consumption, being the main driver of growth downturns, can lead to reduced spending, reinforcing in the Indian economy, is tracked actively by analysts the slowdown through a negative feedback loop as well as policymakers. Though high frequency (Ilut & Saijo, 2020). Recognising the importance of indicators are generally used to monitor the emerging confidence channel, a mixed data sampling (MIDAS) trends in consumption, the qualitative assessment regression is estimated to examine the impact of through the consumer confidence channel is also macroeconomic conditions (GDP growth, government found to be of significance for monetary policy. expenditure, and policy interest rates) on the Current The Reserve Bank of India’s Consumer Confidence Confidence Index and the Future Expectations Index Survey serves as a barometer of public sentiment (Lahiri & Monokroussos, 2016). In the next step, regarding key economic dimensions such as income, the autoregressive distributed lags (ARDL) model is employment, inflation, and households’ spending. estimated, based on quarterly data spanning Q1:2011- It captures consumer perceptions of the prevailing 12 to Q4:2024-25, to investigate the influence of economic conditions through the Current Confidence Index and anticipated conditions over the short to consumer sentiment, captured through the Current medium term through the Future Expectations Index. Confidence Index and the Future Expectations Index, A fall in consumer confidence, especially during on actual private consumption. (Contd.) 36Chapter III Demand and Output The results suggest that macroeconomic conditions Table III.1.1: Relationship between Macro- (especially GDP growth and policy rate) impact Economic Variables, Consumer Confidence and consumer sentiment, which in turn is found to have Private Consumption a positive relationship with private consumption Explanatory Variables Dependent Variables (Table III.1.1). GDP growth influences both Current CCI FEI PFCE Confidence Index and Future Expectations Index, Intercept 3.01 -25.19* -0.02 underscoring its role as a key economic signal. Policy (23.78) (13.98) (0.10) rate changes also impact both the Current Confidence PFCE (Lag 1) 0.08 Index and the Future Expectations Index in the positive (0.16) direction, although the extent of impact varies across CCI 0.14 1.70*** (0.13) (0.33) lags, reflecting dynamic adjustment in consumers’ CCI (Lag 1) -1.38*** expectations. The findings of the ARDL model suggest (0.27) that the Current Confidence Index and lagged Future FEI (Lag 2) 0.38* (0.19) Expectations Index have a statistically significant GDP 1.20*** 0.77*** positive relationship with private consumption. The (0.36) (0.26) negative effect of the lagged Current Confidence Index GDP (Lag 1) 1.18** -0.16 may reflect adjustments based on past uncertainties. (0.43) (0.30) Overall, the results indicate the working of a feedback GDP (Lag 2) 0.92* -0.02 (0.45) (0.29) loop wherein macroeconomic conditions impact Govt expenditure 0.99 1.38** consumer sentiment, which in turn affects private (1.02) (0.61) consumption. Thus, consumer sentiments could WACR# (Lag 1) -0.28* -0.21*** provide valuable insights into the evolving trends in (0.16) (0.10) Residual standard error 8.64 5.08 0.69 private consumption that contribute significantly to Multiple R-squared 0.92 0.88 0.64 aggregate demand. Adjusted R-squared 0.81 0.70 0.56 References: F-statistic 8.12*** 4.82*** 7.43*** Notes: 1. Seasonal variables have been seasonally adjusted, and the Ilut, C., and Saijo, H. (2021). Learning, confidence, and analysis has been conducted using the difference of WACR business cycles. Journal of Monetary Economics, 117, and log differences of other variables. The bi-monthly survey results have been converted to a quarterly frequency by 354-376. aligning them with the reference periods of the corresponding survey rounds. Lahiri, K., Monokroussos, G., and Zhao, Y. (2016). 2. Figures in parenthesis denote corresponding standard errors. Forecasting consumption: The role of consumer 3. CCI: Current Confidence Index; FEI: Future Expectations confidence in real time with many predictors. Journal Index; WACR: Weighted Average Call Rate. # : Co-efficients for subsequent immediate lags are also significant. of Applied Econometrics, 31(7), 1254-1275. *** p<0.01, ** p<0.05, * p<0.1 Rural demand continues to remain resilient on the dropped significantly in July-August, reflecting an back of robust rabi and summer crops production, improvement in farm sector employment. The strong and a positive outlook for kharif output conditioned growth in fast-moving consumer goods sales in rural by the above-normal south-west monsoon. Tractor areas also attests to buoyant demand conditions sales remained upbeat during July-August 2025, (Table III.2). The above normal south-west monsoon and motorcycle sales witnessed a revival during this (SWM) rainfall, higher cumulative kharif sowing and period after contracting in preceding months. The improved reservoir level augur well for sustaining demand for work under the Mahatma Gandhi National the momentum in rural demand. Rural Employment Guarantee Act (MGNREGA) 3377Monetary Policy Report October 2025 Chart III.3: Employment Situation in India a. Monthly Periodic Labour Force Survey b. Net Payroll Additions in EPFO Records (Per cent) (Lakhs) 60 7 25 20 55 6 15 10 50 5 5 45 4 0 Apr-25 May-25 Jun-25 Jul-25 Aug-25 Labour force participation rate Unemployment rate (right scale) Worker population ratio 2023 2024 2025 Sources: Ministry of Statistics and Programme Implementation (MoSPI); and Employees’ Provident Fund Organisation (EPFO). Employment conditions remained steady in 2025-26. coincident indicators of construction activity, steel The labour force participation rate (LFPR) and the consumption and cement production, exhibited worker population ratio (WPR) as per the monthly strong growth during July-August 2025, sustaining Periodic Labour Force Survey (PLFS) improved for healthy momentum. Domestic production of capital both rural and urban areas. The unemployment rate goods recorded modest growth in July after witnesing declined to 5.1 per cent in August 2025 (Chart III.3a). strong growth in Q1. Import of capital goods grew sharply in July before contracting in the month of The Employees’ Provident Fund Organisation (EPFO) August (Table III.3). payroll data also indicate strengthening of formal employment as average net payroll additions during Capacity utilisation in the manufacturing sector1 April-July rose to 17.3 lakh (Chart III.3b). increased marginally to 74.1 per cent in Q1:2025-26 from the same quarter last year. Seasonally adjusted III.1.2 Gross Fixed Capital Formation capacity utilisation at 75.8 per cent in Q1, increased Gross fixed capital formation expanded at a strong by 30 basis points from the previous quarter and was pace in Q1:2025-26, aided by robust government well above the long-period average of 73.9 per cent2 capex. The share of gross fixed capital formation (Chart III.4). Stretched capacity utilisation generally in GDP improved to 34.6 per cent in Q1 from 33.9 necessitates new capacity additions to keep pace with per cent in the previous quarter. The congenial underlying domestic demand. Funds raised for capex financial conditions, engendered by monetary policy by private corporates during Q1 through the different easing, along with healthy twin balance sheets channels (Banks/Financial Institutions, External (banks and corporates) and rising capacity utilisation Commercial Borrowings, Initial Public Offerings) continue to support fixed investment. Among remained stable, despite heightened uncertainties. 1 Based on RBI’s survey of order books, inventories, and capacity utilisation. 2 Long term average is for the period Q1:2008-09 to Q1:2025-26 excluding Q1:2020-21. 38 naJ beF raM rpA yaM nuJ luJ guA peS tcO voN ceD 21.0 5.1Chapter III Demand and Output Table III.3: Indicators of Investment Demand Chart III.4: Capacity Utilisation in Manufacturing (Y-o-y, per cent) (Per cent) 80 Indicators 2024-25 2025-26 Q1 Q2 Q3 Q4 Q1 Jul Aug 78 Import of capital 10.0 11.7 6.0 7.9 14.3 12.0 -1.3 goods 75.8 76 IIP: Capital goods 3.0 4.9 7.4 7.0 9.8 5.0 Finished steel 15.3 11.8 7.8 11.9 7.9 7.3 10.0 74 74.1 consumption 73.9 Cement 0.4 3.2 8.7 12.4 8.0 11.6 6.1 72 production Sources: Directorate General of Commercial Intelligence and Statistics 70 (DGCI&S); NSO; Joint Plant Committee; and Office of Economic Adviser. Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2022-23 2023-24 2024-25 2025- 25 On the other hand, private capex, especially in CU CU (seasonally adjusted) Long-term average export-intensive sectors, faced headwinds from Source: RBI staff estimates. global trade uncertainty (Box III.2). The interest coverage ratio (ICR)3 of the listed private level of one, the elevated interest coverage ratio manufacturing companies improved in Q1:2025-26, of IT firms inched up further (Table III.4). This, in indicating strong debt servicing capacity. Within conjunction with congenial financial conditions the services sector, while interest coverage ratio of and improving domestic demand, should encourage non-IT services remained stable above the threshold firms to undertake new capacity creation. Box III.2: External Demand and Fixed Investment Dynamics: An Empirical Investigation with Firm-level Data Significant deleveraging of corporate balance sheets firms’ investment decisions. In this regard, Fabling took place post-COVID, owing to improved profitability and Sanderson (2013) emphasised that exports provide and easy financial conditions. Strengthening of stable cash flows and ease financial constraints, often balance sheets generally tends to have positive impact leading to firms’ increased investment in fixed assets. on corporates’ investment (Gupta et al., 2023; Wang In India too, it has been observed that investment et al., 2013). The healthy balance sheet of the banking and exports move in tandem, suggesting that export sector coupled with congenial financial conditions performance boosts investment (Chart III.2.1). have eased the financing constraints of corporates for In this backdrop, a fixed effects panel regression is investments. Notwithstanding all these supporting estimated, based on data spanning 2004 to 2024, to factors, the revival in corporate investment cycle examine the impact of exports on firms’ investment in is yet to become broad-based, as new investment is fixed assets. The change in firms’ investment in fixed witnessed only in a few select sectors. capital is taken as dependent variable. Apart from The extant literature underlines the importance of firms’ exports earnings, firm-level control variables foreign market access (exports) and uncertainty in (Contd.) 3 Interest coverage ratio is the ratio of earnings before interest and taxes (EBIT) to interest expenses and measures a company’s capacity to make interest payments on its debt. The minimum value for a viable ICR is 1. 3399Monetary Policy Report October 2025 45 40 35 30 25 20 15 (interest coverage ratio) and aggregate merchandise III.2.1). Exporting firms’ investment is roughly 1 per exports are considered as explanatory variables. The cent more than that of non-exporting firms. Even after results suggest that export growth at both the firm level controlling for firm leverage, export-oriented firms and at the aggregate level has a statistically significant invest about 0.28 per cent higher than non-exporting positive impact on fixed investment growth (Table firms. Based on these results, it may be inferred that Table III.2.1: Relationship between Exports and elevated global economic uncertainty due to multiple Corporate Investment (2004-2024) shocks post COVID coupled with uneven export Variables I II III IV V VI performance during the last few years, may also be ICR (lag 1) 0.12*** contributing to a delayed revival in private corporate (0.005) investment cycle. Export Firm 0.95*** 0.28* (0.141) (0.146) References Taper tantrum -0.29*** (0.009) Fabling, R., & Sanderson, L. (2013). Exporting and Forex earnings 0.03*** 0.02*** 0.02*** 0.02*** firm performance: Market entry, investment and growth (0.001) (0.001) (0.001) (0.001) Exports 0.06*** 0.24*** expansion. Journal of International Economics, 89(2), growth (0.004) (0.008) 422-431. Constant 14.35*** 12.05*** 13.50*** 18.58*** 12.98*** 12.34*** (0.081) (0.099) (0.028) (0.399) (0.044) (0.053) Gupta, K., Kumar, S., & Gulati, S. (2023). Drivers of Observations 115,694 91,300 104,271 104,271 104,271 104,271 Corporate Investment in India: Assessing the Impact R-squared 0.000 0.006 0.008 0.058 0.011 0.026 of Monetary Policy and COVID. South Asia Economic Number of 14,655 14,655 14,655 14,655 Journal, 24(2), 216-251 firms Firm FE YES YES YES YES Wang, J., Gochoco-Bautista, M. S., & Sotocinal, N. R. Year FE YES NO NO (2013). Corporate investments in Asian emerging Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1 markets: Financial conditions, financial development, Notes: 1. Export Firm is defined as firms with exports to sales ratio higher than 30 per cent. and financial constraints. Asian Development Bank 2. Investment is defined as ratio of the annual change in fixed asset with total fixed asset as at end of the financial year. Economics Working Paper Series, (346). 40 28-1891 58-4891 88-7891 19-0991 49-3991 79-6991 00-9991 30-2002 60-5002 90-8002 21-1102 51-4102 81-7102 12-0202 42-3202 Chart III.2.1: Investment trends a. Gross Capital Formation b. Exports and Fixed Investment (Per cent of nominal GDP) [Annual growth (%) in Fixed investment (y - axis), Real exports (x - axis)] 20 15 10 y = 0.38x + 4.50 5 R² = 0.47 0 -5 -10 -10 010 20 30 40 Sources: Ministry of Statistics and Programme Implementation (MoSPI); and RBI staff estimates.Chapter III Demand and Output quality of expenditure. During April-July 2025, this Table III.4: Interest Coverage Ratio ratio remained close to corresponding level of last (Ratio) Industry 2023-24 2024-25 2025- year (Chart III.5b). This reflects the government’s 26 continued thrust on fiscal consolidation without Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 compromising the quality of expenditure. Continued Manufacturing 6.8 7.5 7.4 7.5 7.9 7.9 7.6 8.7 9.1 fiscal consolidation and improvement in the quality Services 1.6 1.4 1.8 1.7 1.8 1.7 2.1 2.1 2.1 (non-IT) of government expenditure, along with strong IT 44.5 43.2 41.2 44.1 42.9 45.6 40.9 44.0 44.3 macroeconomic fundamentals, have contributed to Note: Data for Q1:2025-26 are based on results of 3,079 listed non- India’s sovereign rating upgrade by S&P Global Ratings government non-financial companies. Source: RBI staff estimates. in August 2025- the first upgrade in 18 years. III.1.3 Government Consumption On the revenue receipts front, the central government’s gross tax revenue recorded a muted Government final consumption expenditure grew growth of 0.8 per cent during April-July 2025. Indirect by 7.4 per cent (y-o-y) during Q1:2025-26, as against tax revenue rose by 6.7 per cent, buoyed by higher a contraction in the preceding quarter (Table III.1). receipts from goods and services tax and union excise Revenue expenditure of the central government duties. Direct tax collections, on the other hand, (excluding interest payments and major subsidies) recorded double-digit growth during April-July 2025. recorded a decline of 4.0 per cent, mainly due to This marks a significant turnaround from a modest contraction in personal income tax collections (Table increase in Q4:2024-25 and a contraction in the III.5). Gross goods and services tax collections (Centre corresponding period of the previous year. Capital plus States) expanded by 9.9 per cent during April- expenditure registered a high growth of 32.8 per August 2025, underscoring the sustained momentum cent in April-July (Chart III.5a). On an annual basis, in economic activity (Chart III.6). The central the central government’s revenue expenditure to government has recently undertaken a detailed capital outlay (RECO) ratio has been moderating since overhaul of the GST framework, encompassing three 2020-21, indicating sustained improvement in the pillars – structural reforms, rate rationalisation Chart III.5: Centre’s Expenditure: April - July a. Expenditure Growth b. Quality of Expenditure - Revenue Expenditure (Y-o-y growth in per cent) to Capital Outlay (RECO) 70 (Ratio) 60 50 40 30 20 10 0 -10 -20 Sources: Controller General of Accounts (CGA); and RBI staff estimates. 4411 71-6102 81-7102 91-8102 02-9102 12-0202 22-1202 32-2202 42-3202 52-4202 62-5202 16 14 12 10 8 6 4 2 0 Revenue Expenditure excluding interest payments and major subsidies Capital Expenditure 71-6102 81-7102 91-8102 02-9102 12-0202 22-1202 32-2202 42-3202 52-4202 62-5202 32.8 12.1 4.9Monetary Policy Report October 2025 Table III.5: Central Government’s Tax Collections Item ₹ thousand crore Per cent BE Actuals Per cent to BE Growth Rate 2023-24 2024-25 Apr-Jul Apr-Jul Apr-Jul Apr-Jul Apr-Jul Apr-Jul 2024 2025 2024 2025 2024 2025 A. Direct taxes 2,207 2,520 596 572 27.0 22.7 35.9 -4.0 Of which 1. Corporation tax 1,020 1,082 185 199 18.1 18.4 4.8 7.6 2. Income tax 1,150 1,360 394 355 34.3 26.1 53.4 -9.9 B. Indirect taxes 1,633 1,750 488 521 29.9 29.8 7.1 6.7 Of which 1. Total GST 1,067 1,183 341 375 32.0 31.7 9.5 9.8 2. Custom duties 238 240 68 61 28.4 25.2 3.8 -10.4 3. Union excise duties 319 317 77 84 24.1 26.5 0.8 9.3 C. Gross tax revenue 3,840 4,270 1084 1093 28.2 25.6 21.3 0.8 D. Assignment to States/UTs 1,247 1,422 367 429 29.4 30.1 18.5 16.9 E. Net tax revenue 2,583 2,837 715 662 27.7 23.3 22.8 -7.5 Note: BE: Budget Estimates. Sources: Union Budget Documents; and Controller General of Accounts (CGA). and ease of living. The GST rate structure has been 2025, mainly due to the large surplus transfer of ₹2.69 converted mainly into two slabs of 5 per cent and 18 lakh crore by the Reserve Bank of India in May 2025 per cent with a special 40 per cent rate for luxury and (Chart III.7). Centre’s gross fiscal deficit stood at 29.9 sin goods.4 per cent of its full year budget estimates (BE) during Non-tax revenue of the central government posted April-July 2025, higher than 17.2 per cent recorded in a high growth of 33.7 per cent during April-July the same period last year. Chart III.6: GST Collections (Centre plus States) Chart III.7: Centre’s Non-tax Revenue: April-July (₹ thousand crore) (₹ thousand crore) 250 450 225 400 200 186 350 98 175 300 150 250 125 200 100 150 294 75 50 100 25 50 0 0 12 Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar 2022-23 2023-2024 2024-25 2025-26 2023-24 2024-25 2025-26 Interest receipts Dividends and profits Others Sources: Press information bureau (PIB); and GST website. Source: Controller General of Accounts (CGA). 4 https://www.pib.gov.in/PressReleasePage.aspx?PRID=2156708 42Chapter III Demand and Output Table III.6: State Government Finances - Chart III.8: States’ Capital Outlay Key Deficit Indicators (Ratio, left scale; per cent of GDP, right scale) 7 4 (Per cent to GDP) 2023-24 2024-25 (PA) 2025-26 (BE) 6 3.0 Revenue deficit 0.3 0.6 0.2 3 5 4.9 Gross fiscal deficit 2.9 3.3 3.3 4 Primary deficit 1.2 1.7 1.5 2 Notes: 1. Data pertain to 31 States/UTs. 3 2. PA: Provisional Accounts; BE: Budget Estimates. Sources: Budget Documents of State/UTs; and Comptroller and Auditor 2 1 General (CAG) of India. 1 The consolidated gross fiscal deficit of State governments and Union Territories is budgeted 0 0 2022-23 2023-24 2024-25 (PA) 2025-26 (BE) at 3.3 per cent of GDP for 2025–26, same as in Capital outlay (right scale) the provisional estimates of 2024-25 (Table III.6). Revenue Expenditure to Captial Outlay Ratio Notes: 1. Data pertain to 31 States/UTs. State governments continue to prioritise capital 2. PA: Provisional Accounts; BE: Budget Estimates. Sources: Budget Documents of States/UTs; and CAG. expenditure, as evidenced by an improvement in the Revenue Expenditure to Capital Outlay (RECO) ratio, of their budget estimates, were higher compared to which moderated to 4.9 in 2025-26 (BE) from 6.2 in the corresponding period of last year, primarily due to 2022-2023 (Chart III.8). The states’ capital expenditure deceleration in revenue receipts growth (Chart III.9a). is also supported by the central government through The slowdown in receipts was led by moderation in the ‘Scheme for Special Assistance to States for Capital the growth of state goods and service tax and sales Investment’, under which ₹1.5 lakh crore has been tax/Value Added Tax (VAT) collections, even as state allocated for 2025-26. excise duties and stamp duties and registration fees As per the available data for April-July 2025, the key remained robust. Non-tax revenues increased at a deficit indicators of state governments, as a proportion slower pace relative to the previous year and grants Chart III.9: States’ Key Fiscal Performance Indicators: April-July a. Deficit Indicators b. Revenue and Expenditure (As per cent of budget estimates) (Y-o-y growth in per cent) 90 20 81.4 15 75 11.5 9.8 10 60 5.5 5 45 0 30 22.7 18.9 -5 15 -10 0 -15 Revenue deficit Gross fiscal deficit Primary deficit Revenue receipts Revenue expenditure Capital expenditure 2024-25 2025-26 2024-25 over 2023-24 2025-26 over 2024-25 Note: Data pertain to 24 States/UTs. Source: CAG. 4433Monetary Policy Report October 2025 from the central government contracted further. Chart III.10: Merchandise Trade On the expenditure front, revenue expenditure (Y-o-y growth in per cent, left scale; US$ billion, right scale) growth remained robust and capital expenditure 30 30 recorded a sharp upturn, aided partly by the low base 20 20 (Chart III.9b). 10 10 In the Union Budget for 2025-26, gross and net market 0 0 borrowings through dated securities were provided at ₹14.8 lakh crore and ₹11.5 lakh crore, respectively. -10 -10 During the H1:2025-26 (up to September 26, 2025), -20 -20 gross market borrowings raised by the centre stood -30 -30 at ₹7.95 lakh crore, constituting 53.6 per cent of the annual budgeted amount (Table III.7). The weighted -40 -40 average cost of the issuances at 6.6 per cent was lower than 7.0 per cent in 2024-25. The weighted average maturity of the issuances declined to 19.6 years from Source: DGCI&S. 20.7 years in the previous fiscal. During H2:2025- 26, the centre is expected to raise ₹6.8 lakh crore US$120.5 billion in the same period last year (Chart through dated securities. States mobilised ₹4.7 lakh III.10). Services exports maintained buoyancy with crore through gross market borrowings during H1 double digit growth during April-July 2025. According (up to September 26, 2025), as against the indicative to provisional estimates released by the National calendar amount of ₹5.6 lakh crore. In order to Statistical Office (NSO), real exports and imports of bridge temporary mismatches between receipts and goods and services grew by 6.3 per cent and 10.9 per expenditures, the Ways and Means Advances (WMA) cent, respectively, in Q1:2025–26 (Table III.1). limit for the central government was fixed at ₹1.5 lakh The increase in merchandise exports during H1:2025- crore for H1:2025-26 and has been revised to ₹50,000 26 (April-August) was primarily driven by strong crore for H2. performances in electronic goods, engineering goods, III.1.4 External Demand pharmaceuticals, marine products, and readymade Amidst persisting global trade uncertainty, India’s garments. On the other hand, petroleum products, merchandise exports exhibited uneven performance. iron ore, oil meals, cotton yarn, fabrics, made ups, and During April-August 2025, merchandise exports (in handloom products dragged down the overall export US dollar terms) registered an expansion of 2.5 per growth. Exports of petroleum, oil, and lubricants cent, while merchandise imports rose by 2.1 per cent. (POL) declined by 19.4 per cent y-o-y, amounting to The merchandise trade deficit during April-August US$ 26.1 billion during April-August 2025. In contrast, 2025 widened marginally to US$122.4 billion from non-POL, non-gems and jewellery exports posted 44 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guA 6.7 -10.1 -26.5 Trade balance (right scale) Exports Imports Non-oil non-gold imports Non-oil exports Table III.7: Government Market Borrowings (₹ crore) 2024-25 2025-26 (till September 26, 2025) Centre States Total Centre States Total Net borrowings 11,62,879 7,53,345 19,16,224 5,88,299 3,21,992 9,10,291 Gross borrowings 14,00,697 10,73,310 24,74,007 7,95,000 4,66,692 12,61,692 Sources: Government of India (GoI); and RBI staff estimates.Chapter III Demand and Output Chart III.11: Merchandise Exports a. Exports Growth - Relative Contribution b. Major Drivers of Exports in 2025-26 (April - August) (Percentage points, left scale; per cent, right scale) Relative Contribution (Percentage points) Electronic goods (40.7) Engineering goods (5.8) Drugs and pharmaceuticals (7.3) Marine products (16) RMG of all textiles (5.8) Cashew (-6.3) Cotton yarn/fabs./made-ups, handloom products etc. (-0.6) Oil meals (-17.8) Iron ore (-42.6) Petroleum products (-19.4) Non-POL exports POL exports Merchandise exports (per cent) World trade (right scale) -6 -4 -2 0 2 4 Notes: 1. World trade data is available up to June 2025. 2. Figures in parentheses in chart b are y-o-y percent change in exports of the commodity during the period. Sources: DGCI&S; CPB Netherlands; and RBI staff estimates. a robust growth of 7.8 per cent, reaching US$ 146.7 equipment, pulses, and pearls, precious and semi- billion during the same period (Chart III.11). precious stones declined, dampening overall growth in imports. Petroleum, oil, and lubricants (POL) The growth in merchandise imports during H1:2025- imports contracted marginally by 0.1 per cent to US$ 26 (April-August) was primarily driven by imports of electronic goods, chemical materials and products, 78.1 billion during this period. On the contrary, non- machinery (both electrical and non-electrical), POL, non-gold imports saw a robust expansion of 7.1 fertilisers, and non-ferrous metals. On the other hand, per cent, reaching US$ 211.5 billion, indicating strong imports of gold, coal, coke and briquettes, transport domestic demand (Chart III.12). 4455 5 poT 5 mottoB 30 6 25 5 20 4 15 3 10 2 5 1 0 0 -5 -10 -1 -15 -2 -20 -3 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q guA-luJ 10.3 2022-23 2023-24 2024-25 2025-26 Chart III.12: Merchandise Imports a. Imports Growth - Relative Contribution b. Major Drivers of Imports in 2025-26 (April - August) (Percentage points) Relative Contribution 50 (Percentage points) 40 30 20 10 0 -10 -20 Note: Figures in parentheses in chart b are y-o-y percent change in imports of the commodity during the period. Sources: DGCI&S; and RBI staff estimates. 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q guA-luJ Electronic goods (17.1) Chemical material and products (82.2) Machinery, electrical and non-electrical (14.6) Fertilisers, crude and manufactured (53.0) Non-ferrous metals (9.3) Pearls, precious and semi-precious stones (-2.2) Pulses (-52.3) Transport equipment (-9.8) Coal, coke and briquettes, 2022-23 2023-24 2024-25 2025-26 etc. (-19.5) Gold (-30.7) POL imports Gold imports Non-POL non-gold imports Merchandise imports (per cent) 5 poT 5 mottoB -1.4 -3 -2 -1 0 1 2 3Monetary Policy Report October 2025 India’s services exports remained buoyant during On the financial account, gross inward foreign direct April-July 2025, registering a robust growth of 10.1 investment (FDI) was resilient in 2024-25, expanding per cent, supported by sustained global demand for by 13.1 per cent to US$ 80.6 billion. On a net basis, Indian services (Chart III.13). The expansion was FDI inflows moderated significantly to US$ 1.0 primarily driven by strong performance in software billion, largely due to elevated repatriations and outward FDI. Global investment sentiment has also and business services. Reflecting this resilience, weakened, as evidenced by a contraction in global FDI India retained its position among the top five flows5 for the second consecutive year in 2024. During service-exporting nations in terms of export growth April-July 2025, gross FDI inflows remained strong in Q1:2025-26. Services imports growth moderated at US$ 37.7 billion, underscoring India’s continued to 1.5 per cent in Q1:2025-26 but accelerated to 8.5 appeal as a preferred investment destination. Net per cent in July. FDI inflows at US$ 10.8 billion during this period On a balance of payments basis, India’s current was also higher as compared to US$ 3.5 billion a year account deficit (CAD) stood at 0.2 per cent of GDP ago, primarily on account of a rise in grows inflows in Q1:2025-26, as against 0.9 per cent in Q1:2024- and a moderation in FDI repatriation. Singapore, the 25. This improvement in CAD was underpinned United States, Mauritius, the United Arab Emirates by robust services exports and strong inflow of and the Netherlands emerged as the top sources of remittances that significantly offset the high FDI in April-July 2025, collectively accounting for 76.0 merchandise trade deficit (Chart III.14). Amidst per cent of total inflows. Manufacturing, computer heightened global uncertainty, India continues to services, business services, communication services, receive robust private remittances (US$ 35.3 billion and electricity generation and distribution attracted during Q1:2025-26) and remain the largest recipient the bulk of FDI equity inflows, comprising 74.2 per of private remittances in the world. cent of the total. Chart III.13: Services Trade Chart III.14: Components of (Y-o-y growth in per cent) Current Account Deficit 50 (In US$ billion ) 100 40 80 60 30 40 20 20 0 -2.4 -20 10.3 10 -40 8.5 -60 0 -80 -100 -10 -120 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2* Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2023-24 2024-25 2025-26 2022-23 2023-24 2024-25 2025-26 Exports Imports Goods Services Income Transfers Total current account deficit Note: * Data is for July 2025 Source: RBI. Source: RBI. 5 Excluding financial flows from European conduit economies with elevated volatility. 46Chapter III Demand and Output Table III.8: Net Foreign Direct and Portfolio Investment (US$ billion) 2023-24 2024-25 2025-26 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Net FDI 4.7 -0.8 4.0 2.3 6.2 -2.8 -2.8 0.4 5.7 5.0# Net FPI 16.1 5.3 11.7 11.6 0.9 19.8 -11.4 -6.0 2.5 -5.5* Notes: #: Data is for July 2025. *: Net FPI data for Q1:2025-26 are based on balance of payments (BoP) statistics of RBI, while data for Q2:2025-26 is sourced from daily data, published by NSDL; and data is up to September 26 Sources: National Securities Depository Limited (NSDL); and RBI. Persistent geopolitical tensions, rise in global trade III.2 Aggregate Supply barriers, heightened policy uncertainty, and elevated Aggregate supply – measured by real gross value added U.S. bond yields have collectively dampened foreign at basic prices – expanded by 7.6 per cent in Q1:2025-26 investors sentiment towards emerging market (6.8 per cent in the preceding quarter) – marking a six- economies, especially in equity inflows in recent quarter high supported by a recovery in manufacturing years. Reflecting this sentiment, foreign portfolio and buoyancy in services. Manufacturing and all four investment in India recorded a net outflow of US$ major subsectors of services recorded strong growth 3.0 billion during H1:2025-26 (up to September 26), and cumulatively contributed around 94.3 per cent to mainly owing to outflows in the equity segment. total gross value added (Table III.9). The seasonally Notably, FPI flows had turned positive in Q1:2025-26 adjusted momentum of gross value added moderated after two consecutive quarters of outflows, indicating in Q1 from the previous quarter (Chart III.15b). a brief recovery in investor confidence (Table III.8). III.2.1 Agriculture This momentum reversed in Q2 (up to September 26), as global risk aversion intensified, compounded by Agriculture sector prospects remain favourable, U.S. tariffs. supported by above normal monsoons, adequate reservoir levels, and supportive policy interventions. External commercial borrowing inflows decreased Real gross value added in the agriculture, forestry, and to US$ 3.7 billion during April-August 2025 from fishing sector expanded by 3.7 per cent in Q1:2025-26, US$ 4.9 billion a year earlier. Of these borrowings, lower than 5.4 per cent in Q4:2024-25 but higher than approximately 60.6 per cent were hedged, reflecting a 1.5 per cent in the same period of last year. Southwest prudent approach in the wake of high global financial monsoon commenced eight days ahead of its normal volatility. Net accretions to non-resident deposits schedule,6 and gained significant momentum, covering during April-July 2025 moderated to US$ 4.7 billion the entire country by June 29. As of September 26, from US$ 5.8 billion in the same period last year. 2025, the cumulative rainfall was 7 per cent above This decline was driven mainly by reduced inflows the Long Period Average (Chart III.16a). Regionally, in Foreign Currency Non-Resident Bank [FCNR(B)] rainfall exceeded the Long Period Average across all deposits. As of September 19, 2025, India’s foreign regions, except in East and Northeast India. exchange reserves stood at US$ 702.6 billion, sufficient to cover 11.5 months of annualised merchandise Kharif sowing recorded an increase of 0.6 per cent imports (on a balance of payments basis) or 95.4 per as on September 26, 2025 over the last year, on the back of good progress of southwest monsoon and also cent of the country’s outstanding external debt as of exceeding season’s normal sown area. The rise in kharif end-March 2025. 6 https://internal.imd.gov.in/press_release/20250524_pr_3998.pdf 4477Monetary Policy Report October 2025 Table III.9: Real Gross Value Added Growth (Y-o-y, per cent) Sector 2023-24 2024-25 Weighted 2023-24 2024-25 2025-26 Contribution (FRE) (PE) 2022-23 2023-24 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Agriculture, forestry and fishing 2.7 4.6 0.4 0.7 5.7 3.7 1.5 0.9 1.5 4.1 6.6 5.4 3.7 Industry 11.0 4.5 2.4 1.0 6.6 15.3 12.6 9.9 7.8 2.1 3.5 4.7 5.8 Mining and quarrying 3.2 2.7 0.1 -0.2 4.1 4.1 4.7 0.8 6.6 -0.4 1.3 2.5 -3.1 Manufacturing 12.3 4.5 2.1 5.4 7.3 17.0 14.0 11.3 7.6 2.2 3.6 4.8 7.7 Electricity, gas, water supply and 8.6 5.9 0.2 -0.5 4.1 11.7 10.1 8.8 10.2 3.0 5.1 5.4 0.5 other utilities Services 9.2 7.5 5.8 4.8 12.1 8.3 8.5 8.0 7.2 7.4 7.5 7.9 9.0 Construction 10.4 9.4 0.9 8.7 9.2 14.6 10.0 8.7 10.1 8.4 7.9 10.8 7.6 Trade, hotels, transport, 7.5 6.1 1.4 -7.3 11.0 5.4 8.0 6.2 5.4 6.1 6.7 6.0 8.6 communication Financial, real estate and 10.3 7.2 2.4 -1.3 15.0 8.3 8.4 9.0 6.6 7.2 7.1 7.8 9.5 professional services Public administration, defence 8.8 8.9 1.1 0.8 9.3 8.9 8.4 8.7 9.0 8.9 8.9 8.7 9.8 and other services GVA at basic prices 8.6 6.4 8.6 6.4 9.9 9.2 8.0 7.3 6.5 5.8 6.5 6.8 7.6 Note: FRE: First revised estimates; PE: Provisional estimates. Sources: NSO; and RBI staff estimates. acreage was primarily led by rice, maize, urad and rainfall index (PRN) stood at 110 per cent, sugarcane (Chart III.16b). As of September 25, 2025, indicating relatively higher rainfall in major foodgrain producing states (Chart III.16d). Adequate reservoir levels stood at 90 per cent of total capacity, soil moisture conditions coupled with healthy exceeding the levels recorded a year ago as well as reservoir storage are expected to boost the Rabi the decadal average (Chart III.16c). Furthermore, prospects. as of September 26, 2025, the production-weighted Chart III.15: Gross Value Added Growth and its Constituents a. Weighted Contribution of the Components b. GVA Growth and Momentum to GVA Growth (Per cent) (Percentage points) 16 12 12 10 8 7.6 7.6 8 6 6.9 4 4 2 0 0 -2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 -4 2023-24 2024-25 2025-26 -8 Public administration, defence and other services Financial, real estate & professional services -12 Trade, hotels, transport, communications Construction Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Electricity, gas and water supply Manufacturing 2022-23 2023-24 2024-25 2025 -26 Mining & Quarrying Agriculture GVA (y-o-y, per cent) y-o-y q-o-q SAAR Note: SAAR – Seasonally adjusted annualised rate. Sources: NSO; and RBI staff estimates. 48Chapter III Demand and Output Chart III.16: Progress of Rainfall, Reservoir Level and Kharif Sowing a. Cumulative Weekly Progress of Southwest b. Kharif Sown Area (as on September 26) Monsoon Rainfall$ (Lakh hectare, left scale; per cent, right scale) (Deviation from LPA in per cent) 30 7.0 10 -10 -30 -50 -70 Normal (Full Season)* 2024-25 2025-26 2023 2024 2025 Y-o-y growth (right scale) c. Reservoir level (September 25, 2025) d. Production-weighted Rainfall Index (PRN) (Per cent of live capacity at FRL) (June 1 - September 26) 120 (Index in per cent) 100 8790 120 107 110 80 77 100 80 60 60 40 40 20 20 0 0 Northern Eastern Western Central Southern All India 2020 2021 2022 2023 2024 2025 Average of last 10 years 2024 2025 IMD Index PRN Notes: *Normal area is the average of 5 years - 2019-20 to 2023-24. $Rainfall for 2025 is till September 26; FRL: Full Reservoir Level; PRN: Production-weighted Rainfall Index Sources: India Meteorological Department (IMD); Central Water Commission (CWC); Ministry of Agriculture and Farmers' Welfare (MoAFW); and RBI staff estimates. According to the third advance estimates of crops in the previous quarter (7.8 per cent a year ago). This production for 2024-25, total foodgrain output was primarily driven by a rebound in manufacturing increased by 6.5 per cent to 3,540 lakh tonnes. activity with improving profit margins due to low Except for sugarcane, cotton, and jute and mesta, all input costs. Mining and quarrying contracted, while major crops have recorded an increase in production electricity, gas, water supply, and other utility services (Table III.10). increased marginally during Q1 (Chart III.17). The Government announced Minimum Support Index of industrial production (IIP) expanded by Prices for kharif crops for the 2025-26 marketing 2.0 per cent during April-July 2025 (Table III.11). season, increasing in the range of 1.0-13.9 per cent.7 As alluded to earlier, the expansion in industrial The relative changes in Minimum Support Price are production was mainly driven by higher growth expected to promote crop diversification, address in manufacturing output, which registered a six- demand-supply imbalances, and foster sustainable month high in July. Mining and quarrying output agricultural practices. contracted during April-July 2025, partly owing to III.2.2 Industry monsoon-related disruptions. Electricity generation Gross value added of the industrial sector expanded by remained muted, due to lower than usual summer 5.8 per cent in Q1:2025-26, as compared to 4.7 per cent temperature. Within manufacturing, production of 7 https://desagri.gov.in/wp-content/uploads/2025/06/MSP-Notification-KMS-2025-26-English.pdf 4499 1 keeW 2 keeW 3 keeW 4 keeW 1 keeW 2 keeW 3 keeW 4 keeW 1 keeW 2 keeW 3 keeW 4 keeW 5 keeW 1 keeW 2 keeW 3 keeW 4 keeW 500 10 400 6.6 6 300 3.2 200 1.4 0.8 -2.6 2 -2 100 0 -5.2 -6 June July August September eciR sesluP slaerec esraoC sdeesliO nottoC enacraguSMonetary Policy Report October 2025 Table III.10: Agricultural Production in 2024-25 (Lakh tonnes) Crop 2023-24 2024-25 Variation in 2024-25 (Per cent) Final SAE TAE Over Final 2023-24 Over SAE 2024-25* Foodgrains 3323.0 3309.2 3539.6 6.5 1.3 Kharif 1557.7 1663.9 1680.7 7.9 1.0 Rabi 1600.1 1645.3 1672.2 4.5 1.6 Summer 165.2 - 186.8 13.0 - Rice 1378.3 1364.4 1490.7 8.2 0.8 Wheat 1132.9 1154.3 1175.1 3.7 1.8 Coarse cereals 569.4 560.3 621.4 9.1 2.2 Pulses 242.5 230.2 252.4 4.1 -0.2 Oilseeds 396.7 416.7 426.1 7.4 -0.7 Sugarcane 4531.6 4350.8 4501.2 -0.7 3.5 Cotton # 325.2 294.3 306.9 -5.6 4.3 Jute & Mesta ## 96.9 86.2 87.5 -9.8 1.4 Notes: *: SAE covers production of Kharif and Rabi crops only. Growth is calculated accordingly. #: Lakh bales of 170 kgs each; ##: Lakh bales of 180 kgs each. SAE: Second Advance Estimates. TAE: Third Advance Estimates. Sources: MoAFW; and GoI. basic metal electrical equipment, motor vehicles, goods and consumer non-durable goods contracted trailers and semi-trailers, machinery and equipment, during this period. and fabricated metal products were the growth Gross value added of electricity, gas, water supply, and drivers, while chemicals, beverages, printing, paper, other utility services grew modestly in Q1:2025-26, leather, and other manufacturing products acted as compared to a double-digit growth last year, mainly a drag. In terms of use-based classification, capital, due to a decline in electricity generation. Conventional infrastructure, intermediate, and consumer durables power generation declined during April-August 2025, rose during April-July. On the other hand, primary reflecting both reduced demand in the face of subdued Chart III.17: Industrial GVA Growth a. Weighted Contribution to Industrial GVA Growth b. Manufacturing Sector Profitability (Percentage points) (Y-o-y growth in per cent) 16 60 12 45 8 30 5.8 15.0 4 15 0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2023-24 2024-25 2025-26 -15 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Electricity, gas, water supply and other utility services 2022-23 2023-24 2024-25 2025 Manufacturing -26 Mining and quarrying Cost of raw materials Staff cost Interest expenses Industry (y-o-y) Depreciation Profit before tax Note: Data for Q1:2025-26 in chart b are based on results of 1,736 listed private manufacturing companies. Sources: Capitaline and RBI staff calculations. 50Chapter III Demand and Output Table III.11: Industrial Sector y-o-y growth (Y-o-y, Per cent) Indicators 2024-25 2025-26 Q1 Q2 Q3 Q4 Q1 Jul Aug Sep 1 PMI: Manufacturing (>50 indicates growth over 58.2 57.4 56.8 57.4 58.1 59.1 59.3 58.5* previous month) 2 Index of Industrial Production (IIP) 5.5 2.7 4.1 4.0 2.0 3.5 3 IIP: Manufacturing 4.3 3.3 4.5 4.2 3.3 5.4 4 IIP: Primary goods 6.9 1.6 3.0 4.1 -1.4 -1.7 5 IIP: Capital goods 3.0 4.9 7.4 7.0 9.8 5.0 6 IIP: Intermediate goods 3.5 4.8 5.3 3.4 5.0 5.8 7 IIP: Infrastructure and construction goods 8.1 3.9 7.0 8.1 6.0 11.9 8 IIP: Consumer durables 10.7 6.6 9.0 5.9 2.6 7.7 9 IIP: Consumer non-durables -0.2 -2.2 -1.6 -2.0 -1.5 0.5 10 Eight Core Industries (ECI) 6.3 2.4 4.9 4.3 1.5 3.7 6.3 11 ECI: Steel 8.4 4.3 7.8 6.8 7.2 16.6 14.2 12 ECI: Cement 0.4 3.2 8.7 12.4 8.0 11.6 6.1 13 Electricity demand 11.8 12.6 12.8 11.5 8.5 2.6 3.8 Production of Automobiles 14 Passenger vehicles 6.2 -0.5 3.3 6.4 4.9 0.1# -4.1# 15 Two wheelers 19.6 12.5 8.0 5.8 0.7 12.3 10.0 16 Three wheelers 9.5 6.3 -2.6 9.5 9.8 24.0 15.8 17 Tractors 1.0 3.2 12.1 11.7 12.7 11.5 9.4 Notes: #: Doesn’t include Tata Motors; and * : Flash PMI release. Sources: CMIE; CEIC; HSBC, S&P Global; Office of Economic Advisor; NSO; SIAM; TMA; and RBI staff estimates. summer and strong expansion in renewable energy electricity demand declined across all regions in Q1, sources. Given India’s continued thrust on greener with the sharpest drop in the northern region, as the energy, renewable energy sources expanded by 24.8 early monsoon kept power demand low. Demand in per cent during April-August, accounting for about 18 all the regions, except the northern region, picked up per cent of total electricity generation. Region-wise, during July-August (Table III.12). Table III.12: Electricity Generation and Consumption (Y-o-y, per cent) Indicators 2023-24 2024-25 2025-26 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Jul Aug Electricity Generation Thermal 2.1 14.7 14.3 10.1 12.0 -1.4 0.0 0.4 -8.1 -4.7 0.4 Nuclear -6.4 16.7 10.0 -2.2 28.3 18.4 11.4 16.9 11.3 -5.5 -25.2 Hydro -10.0 -13.4 -30.7 -20.2 1.3 6.2 28.3 19.8 13.4 23.4 9.0 Renewables 8.1 21.9 7.0 5.6 7.0 7.3 17.2 22.8 24.8 26.4 22.7 Electricity Consumption Northern region -8.9 8.4 6.0 8.3 22.0 3.1 9.5 1.6 -3.0 -5.4 1.5 Western region 3.5 20.8 7.7 7.1 5.5 -6.7 0.4 4.4 -0.3 7.6 9.3 Southern region 10.7 16.3 18.2 9.3 3.3 0.8 -2.3 3.1 -1.3 9.5 -0.9 Eastern region 4.9 6.6 9.2 7.9 9.8 0.6 3.9 3.9 -1.7 2.0 7.3 All-India 1.5 13.4 9.9 8.1 10.2 -0.7 2.6 3.2 -1.5 2.6 3.8 Sources: Central Electricity Authority (CEA); and Power System Operation Corporation Limited (POSOCO). 5511Monetary Policy Report October 2025 Manufacturing purchasing managers index (PMI) The momentum was driven by an upsurge in trade, signalled further improvement in overall business hotels, transport, communication, and services related conditions, rising to 59.2 in July-August 2025 from 58.1 to broadcasting; financial, real estate and professional in Q1:2025-26, supported by strong domestic orders. services; and public administration, defence and other Business expectations for manufacturing exhibited services (Chart III.19a). continued optimism, while the new export orders Construction activity, which is labour-intensive, index recorded a moderation, displaying the US tariffs- recorded strong growth in Q1:2025-26, partly owing related impact. India's flash manufacturing PMI stood to higher government's infrastructure spending. at 58.5 in September, well above its long-run average High frequency indicators of construction – steel (Chart III.18a). consumption and cement production – remained steady during July-August (Chart III.19b). To enhance competitiveness and ease of doing business, the government has implemented a Real gross value added of trade, hotels, transport, simplified two slab GST 2.0 with effect from communication, and services relating to broadcasting September 22, 2025.8 In addition, the Government has inched up by 8.6 per cent in Q1:2025-26 (6.0 per cent announced a host of other structural reforms which in Q4:2024-25). Trade activity continued to exhibit would improve productivity, competitiveness, and resilience in Q2, as indicated by robust growth in boost potential of the industrial sector (Table III.13). issuances of e-way bills and healthy expansion in GST collections during July-August. Indicators of III.2.3 Services transportation services displayed a mixed picture in Services sector remained the main driver of gross Q2 – toll collections remained robust in July-August, value added in the economy, recording an eight- while domestic air passenger traffic contracted during quarter high growth of 9.0 per cent in Q1:2025-26 and the same period. Air and port cargo traffic remained in contributed more than three-fourth to overall growth. expansionary zone with modest growth in July. Chart III.18: PMI Manufacturing and Services a. PMI Manufacturing b. PMI Services (Index) (Index) 70 60 50 40 30 20 10 0 PMI manufacturing New orders PMI services New business New export orders No change New export business No change Future output Business expectations Notes: PMI>50: Expansion; PMI< 50: Contraction; and * Flash PMI release. Source: HSBC, S&P Global. 8 https://www.pib.gov.in/PressReleasePage.aspx?PRID=2163555 52 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guA *52-peS 70 60 50 40 30 20 10 0 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guA *52-peS 61.6 58.5Chapter III Demand and Output Table III.13: Key Government Initiatives to Support Industrial Growth and Energy Self-Reliance Measures Details and Purpose National Deepwater Exploration To harness India’s offshore energy resources, boosting energy self-reliance and reducing dependence on foreign Mission fuel imports, advancing India’s energy security. Task Force for Next-Generation To evaluate and streamline laws, rules, and procedures related to economic activities, reducing compliance costs Reforms and fostering innovation, entrepreneurship, and growth for startups, MSMEs, and entrepreneurs. Opening Nuclear Sector to To enable private sector participation in nuclear energy and technology, expanding opportunities in energy and Private Players technological innovation. A ₹1 lakh crore employment scheme providing ₹15,000 to newly employed youth, aimed at benefiting 3 crore PM Viksit Bharat Rozgar Yojana young Indians and supporting inclusive economic development. National Critical Minerals To explore 1,200 sites to secure minerals vital for energy, industry, and defence, ensuring access to critical Mission resources for strategic sectors. Made in India Semiconductor To launch the country’s first domestically manufactured semiconductor chip by year-end, marking a major step in Chip strengthening domestic technology manufacturing. High-Powered Demography To address national security challenges arising from illegal migration and demographic imbalances in border areas, Mission thereby enhancing border security and stability. Source: Press Information Bureau (PIB). Financial, real estate and professional services rose by that financial services have kept the momentum 9.5 per cent in Q1:2025-26, contributing a major part during Q2. to service sector growth (43.8 per cent) as well as to Corporate performance in services sector strengthened aggregate growth (33.7 per cent). Bank credit growth in Q1:2025-26. Operating profit of information technology firms improved to 5.4 per cent during improved during Q2 from the last quarter, while Q1 from 2.4 per cent in the previous quarter due to bank deposit growth witnessed moderation. Life moderated growth in staff costs. Non-IT services insurance premium expanded at a robust pace in July, firms recorded robust operating profit of 11.3 per while non-life insurance premium registered modest cent during Q1, despite having moderated from the growth (Table III.14). All these indicators suggest previous quarter (Chart III.20). Chart III.19: Services Sector a. Growth of Service Sector Components b. Construction Indicators (Y-o-y growth in per cent) (Y-o-y growth in per cent) 25 20 20 15 9.8 15 10 5 10 0 5 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2023-24 2024-25 2025-26 0 Construction -5 Trade, hotels, transport, communication and services related to broadcasting Financial, real estate & professional services Public administration, defence and other services Finished steel consumption Cement production Sources: NSO; Office of Economic Adviser; and Joint Plant Committee. 5533 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guA 9.5 8.6 7.6 10.0 6.1Monetary Policy Report October 2025 Table III.14: Services Sector y-o-y growth (Y-o-y, per cent) Indicators 2024-25 2025-26 Q1 Q2 Q3 Q4 Q1 Jul Aug Sep 1 PMI: Services (>50 indicates growth over previous month) 60.5 59.6 58.7 58.0 59.3 60.5 62.9 61.6* Construction 2 Steel consumption 15.3 11.8 7.8 11.9 7.9 7.3 10.0 3 Cement production 0.4 3.2 8.7 12.4 8.0 11.6 6.1 Trade, Hotels, Transport, Communication and Services related to Broadcasting 4 Commercial vehicle sales 3.7 -11.0 1.2 1.5 -0.6 5 Domestic air passenger traffic 5.6 7.2 11.4 12.0 5.3 -2.5 -0.5 6 Domestic air cargo 7.1 7.6 4.6 3.1 6.6 4.8 7.1 7 International air cargo 18.4 21.9 15.0 1.3 4.7 4.2 4.5 8 Freight traffic 5.1 0.4 1.5 -0.4 2.4 0.0 9 Port cargo 3.9 6.2 -1.7 9.0 5.6 4.0 2.5 10 Toll collection: volume 5.6 7.6 9.8 15.1 16.2 14.8 16.1 11 Petroleum consumption 3.9 1.0 5.4 -1.8 0.5 -3.9 2.6 12 GST E-way bill 16.0 16.8 16.9 19.4 20.5 25.8 22.4 13 GST revenue 10.1 8.9 8.3 10.4 11.8 7.5 6.5 Financial, Real Estate and Professional Services 14 Credit outstanding 13.9# 13.0 11.2 11.0 9.5 10.0 10.0 10.4 15 Bank deposits 10.6# 11.5 9.8 10.3 10.1 10.2 10.2 9.5 16 Life insurance premium 22.9 16.5 -6.6 -4.3 4.3 22.4 -5.2 17 Non-life insurance premium 13.5 1.8 10.8 1.7 8.8 2.6 1.6 Notes: #: Excluding impact of merger; * : Flash PMI release. Sources: CEIC; NSO; HSBC, S&P Global; MOSPI; Insurance Regulatory and Development Authority of India (IRDAI); and RBI staff estimates. Real estate activity displayed buoyancy in Q1:2025- duty collections of state governments (Chart III.21a). 26 as reflected in robust registration and stamp All-India housing prices recorded a modest growth in Q4:2024-25, with prices declining in Delhi Chart III.20: Operating Profit Growth (Chart III.21b). Public administration, defence, and (Y-o-y growth in per cent) other services (PADO) grew at a 12-quarter high of 40 9.8 per cent in Q1. The centre’s revenue expenditure, 35 excluding interest payments and subsidies, expanded 30 by 18.6 per cent during July-August. Growth in other 25 services like health, education and other personal 20 services remained strong, alongside a recovery in 15 11.3 government consumption in Q1. 10 5.4 Services PMI indicated strong expansion, as it, rose 5 to 61.7 in July-August 2025 from an average of 59.3 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 in Q1:2025-26. The strong reading of services PMI 2023-24 2024-25 2025-26 was supported by robust demand and new business Services (IT) Services (non-IT) activity (Table III.14). The composite PMI index inched Note: Results are based on 2,951 listed non-government non-financial companies for Q1:2025-26. up from 60.0 in Q1 to 62.1 in Q2 (up to August). PMI Source: RBI staff estimates. manufacturing and PMI services readings for India 54Chapter III Demand and Output Chart III.21: Housing Sector a. Registration and Stamp Duties b. Housing Price Index (Y-o-y growth in per cent) (Y-o-y growth in per cent) 16 16 14 14 12 12 10 9.9 10 8 6 8 4 3.1 6 2 0 4 -2 2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 0 2023-24 2024-25 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Mumbai Delhi Bengaluru 2023-24 2024-25 2025-26 Chennai All India Sources: CAG; and RBI. have remained the highest globally since July 2022 resilient services sector, healthy balance sheets of and April 2023, respectively. financial entities and corporates, and congenial financial conditions are expected to boost aggregate III.3 Conclusion demand and growth. Structural reforms and GST Economic activity remained resilient, mainly rationalisation are likely to mitigate the adverse supported by strong rural demand and robust impact of trade uncertainty surrounding US tariffs. government expenditure. Revival in manufacturing The headwinds emanating from prolonged geopolitical and persistent strong performance of services sector tensions, persisting global uncertainties, and volatility drove the recent momentum in aggregate output. in global financial markets continue to pose risks to the Going ahead, sustained buoyancy in rural economy, growth outlook. 5555Monetary Policy Report October 2025 IV. Liquidity Conditions and Financial Markets Domestic financial markets remained resilient and relatively stable in contrast to volatile global markets during H1:2025-26. The Reserve Bank ensured sufficient liquidity in the banking system. Money market rates moved in tandem with the policy repo rate and shifts in liquidity conditions. Transmission to lending and deposit rates remained robust. Market-based, non-bank sources of financing more than made up for the moderation in bank credit growth in H1. Introduction IV.1 Liquidity Conditions and the Operating Procedure of Monetary Policy During H1:2025-26, global financial markets turned intermittently volatile amidst heightened trade- The Reserve Bank of India Act, 1934 requires the related and geopolitical uncertainties. Advanced Reserve Bank to place the operating procedure economy central banks have adopted a cautious relating to the implementation of monetary policy data-dependent approach, given large uncertainties and changes thereto from time to time, if any, in the clouding the macroeconomic outlook. Global bond public domain. The Reserve Bank’s extant Liquidity yields, especially at the longer end, hardened in the Management Framework, implemented in February wake of elevated and rising public debt. Global equity 2020, has been operative for more than five years.1 markets gained in H1 amidst recurrent bouts of sell- Since then, the financial landscape has undergone offs. The US dollar traded with a weakening bias, several structural changes, including the expanding reflecting trade policy uncertainty, fiscal concerns, footprint of digital payments, operationalisation of and shifting expectations about the Fed’s policy path (see Chapter V for details). a 24×365 payment systems and adoption of “Just- in-Time” release of funds for centrally sponsored In contrast to volatile global markets, domestic financial schemes. These developments have profoundly markets remained resilient and relatively stable altered the liquidity management paradigm of the during H1. The Monetary Policy Committee reduced the policy rate cumulatively by 75 bps during H1. banking system, further compounded by volatile Liquidity in the banking system remained in surplus, capital flows with their attendant implications for mainly supported by durable liquidity injections system liquidity. by the Reserve Bank and pick-up in government A disconcerting development from a liquidity spending. Money market rates remained largely management perspective of the Reserve Bank has been aligned to the policy rate, facilitating transmission to the gradual shrinking of the share of uncollateralised other markets (bond and credit markets). Monetary call money market in total overnight money market policy transmission was aided by a sizeable and faster volume. In this regard, questions were raised on the decline in lending and deposit rates in the current appropriateness and efficacy of the weighted average easing cycle. Bank credit growth, despite lower than call rate (WACR) as the operating target of monetary last year, continues to be healthy and supportive of real economic activity. The financing from non-bank policy. Against this backdrop, the Reserve Bank sources has increased, reflecting higher reliance on constituted an Internal Working Group whose major market-based funding and offsetting the drag from recommendations suggested status quo in continuing muted bank credit growth. with the existing framework (Box IV.1). 1 The revised liquidity management framework was announced on February 6, 2020, in the Statement on Developmental and Regulatory Policies, and operationalised on February 14, 2020. The salient features of the framework were given in the Monetary Policy Report of April 2024. 56Chapter IV Liquidity Conditions and Financial Markets Box IV.1: Review of the Extant Liquidity Management Framework – Major Recommendations Operating Target • Transient liquidity shall be managed primarily through 7-day repo/ reverse repo operations and • The WACR should continue as the operating other operations of tenors from overnight up to 14 target of monetary policy. WACR, being an days at the discretion of the Reserve Bank, based on uncollateralised rate, reflects credit/counterparty its assessment of the system liquidity requirement. risk that is not masked by collateral. Furthermore, WACR exhibits a high degree of correlation with • The variable rate auction mechanism shall be other money market rates. With the participants continued for conducting repo/reverse repo in the call money market being entities under its operations as bids received in such auctions regulatory purview, the Reserve Bank has better provide useful signal for assessing the true extent control over the WACR. From this perspective, of funds required from (or to be deployed with) the collateralised market rates were not deemed the central bank. Instruments under the extant to be appropriate as the operating target as these Liquidity Management Framework were deemed segments are dominated by non-bank entities not to be sufficient for meeting the durable liquidity regulated by the Reserve Bank and, as such, do not needs of the system and hence, the toolkit to reflect the dynamics of the inter-bank market for manage durable liquidity remains unchanged. reserves. Minimum Daily Reserve Requirement Policy Corridor • It was decided to continue with the daily minimum • With regard to the appropriate corridor width, it requirement of 90 per cent of the prescribed cash was noted that while a wider corridor can encourage reserve ratio (CRR). While acknowledging that higher inter-bank activity, it also entails greater reducing the minimum daily requirement may volatility in overnight rates, thereby hindering the provide greater headroom to banks to effectively transmission to short-term rates. At the same time, manage their liquidity over the maintenance period, a narrow corridor, while providing the advantage of it entailed risks of inducing greater volatility in the better anchoring of short-term rates, may come at WACR, especially towards the end of the reporting the cost of reduced incentives for banks to transact cycle. The case for no change was also due to the among themselves. On balance, it was decided observation that at the system level, banks rarely to continue with the existing symmetric corridor maintain daily reserve balances below 95 per cent of 50 bps width, with the policy repo rate at the of the prescribed CRR. middle. Standalone Primary Dealers’ (SPDs) Participation in Liquidity Management Instruments LAF Operations • Banks faced challenges in forecasting their liquidity • SPDs were already allowed to participate in all repo position for a longer period resulting in their lower participation in 14-day main operations. This operations irrespective of the tenor effective March undermined the efficacy of main operations for 26, 2025. Therefore, SPDs need not be given access liquidity management. Accordingly, 14-day Variable to the Marginal Standing Facility (MSF), as, unlike Rate Repo/Variable Rate Reverse Repo (VRR/ banks, they have neither reserve requirements nor VRRR) auctions were discontinued as the main unforeseen payment obligations beyond market operation. hours. 5577Monetary Policy Report October 2025 During H1:2025-26, the Monetary Policy Committee auctions effective June 11, 2025 and started variable reduced the policy repo rate by 75 basis points (bps) – rate reverse repo (VRRR) auctions from June 27, a 25 bps cut in April followed by a 50 bps cut in June. 2025. On June 25, 2025, the Reserve Bank announced With a cumulative rate cut of 100 bps since February extension in the market timings of both collateralised 2025, the Monetary Policy Committee in its June and uncollateralised segments of the money market policy noted that monetary policy was left with very to facilitate market development, enhance price discovery, and help banks optimise their liquidity limited space to support growth under the prevailing requirements. Furthermore, the aggregate limit circumstances. Accordingly, it recalibrated the stance available to Standalone Primary Dealers (SPDs) of monetary policy to neutral from accommodative. under the Standing Liquidity Facility was increased The Reserve Bank also announced a reduction in from ₹10,000 crore to ₹15,000 crore beginning April the CRR by 100 bps to 3.0 per cent of net demand 2, 2025. and time liabilities (NDTL) in a staggered manner during September-November 2025. This reduction Drivers and Management of Liquidity in four equal tranches of 25 bps each with effect System liquidity, as measured by the net balances from the fortnights beginning September 6, October under the liquidity adjustment facility (LAF), 4, November 1, and November 29, 2025 will release transitioned to surplus in H1:2025-26 from deficit primary liquidity of about ₹2.5 lakh crore into the in H2:2024-25 (Chart IV.1). The Reserve Bank’s banking system by December 2025. Besides providing durable liquidity injections during Q4:2024-25 along durable liquidity, the CRR cut would also reduce with increase in government spending drove this the cost of funds for the banks, thereby facilitating transition. transmission to the credit market. On a net basis, average daily absorption amounted In view of surplus liquidity conditions, the Reserve to ₹2.31 lakh crore in H1 (up to September 28, 2025) Bank discontinued the daily variable rate repo (VRR) as against average daily injection of ₹0.36 lakh Chart IV.1: Liquidity Operations (₹ lakh crore) 4.5 3.5 2.5 1.5 0.5 -0.5 -1.5 -2.5 -3.5 -4.5 Daily standing deposit facility Variable rate reverse repo Net liquidity adjustment facility Marginal standing facility Variable rate repo Total absorption Source: RBI. 58 42-tcO-81 42-voN-20 42-voN-71 42-ceD-20 42-ceD-71 52-naJ-10 52-naJ-61 52-naJ-13 52-beF-51 52-raM-20 52-raM-71 52-rpA-10 52-rpA-61 52-yaM-10 52-yaM-61 52-yaM-13 52-nuJ-51 52-nuJ-03 52-luJ-51 52-luJ-03 52-guA-41 52-guA-92 52-peS-31 52-peS-82Chapter IV Liquidity Conditions and Financial Markets crore in H2:2024-25. Changes in the Government of facility (SDF) balances remained elevated. Of the India (GoI) cash balances, expansion in currency in average total absorption under the LAF at ₹2.52 lakh circulation (CiC) and volatile capital flows emerged as crore during H1, average placement under the SDF the major drivers of liquidity during H1. The leakage constituted about 72.6 per cent (₹1.84 lakh crore), in the banking system liquidity due to the increase while the remaining surplus was absorbed through in currency demand, buildup in GoI cash balances VRRR auctions. Banks’ holding of elevated SDF and the Reserve Bank’s forex market operations was balances, inter alia, reflects their high precautionary more than compensated by the reduction in CRR and demand for liquidity given the changing payments the Reserve Bank’s durable liquidity augmenting system landscape. Moreover, lower credit demand measures during H2:2024-25 and H1:2025-26. The resulted in a larger deployment of funds by banks Reserve Bank’s Open Market Operations (OMOs) under the SDF. purchases and term repo operations in Q1:2025- To improve monetary transmission during the 26 more than offset the drag on liquidity from the current easing cycle, the Reserve Bank complemented seasonal expansion in currency in circulation (CiC). frontloaded rate cuts with the infusion of sufficient Liquidity conditions, however, moderated in Q2 on liquidity in the banking system. Continuing its account of buildup in GoI cash balances and RBI’s liquidity injection measures of Q4:2024-25, the forex operations (Table IV.1). Reserve Bank injected durable liquidity amounting With liquidity conditions remaining in surplus, to ₹2.65 lakh crore through nine OMO purchases banks’ recourse to the MSF averaged at ₹0.02 lakh and one term VRR auction during April-May 2025 crore during H1:2025-26, while daily standing deposit (Table IV.2). Table IV.1: Liquidity – Key Drivers and Management (₹ crore) 2024-25 2025-26 H1 H2 Q1 Q2* H1* Drivers (i) CiC [withdrawal (-) /return (+)] 33,551 -2,37,928 -1,00,724 22,792 -77,932 (ii) Net Forex Purchases (+)/ Sales (-) 70,402 -3,61,635 3,892 -1,45,483 -1,41,591 (iii) GoI Cash Balances [build-up (-) / drawdown (+)] -1,50,494 1,85,231 -96,083 -1,34,720 -2,30,803 (iv) Excess Reserves [build-up (-) / drawdown (+)] 36,768 1,572 34,163 -4,704 29,459 Management (i) Net OMO Purchases (+)/ Sales (-) -24,040 2,83,386 2,39,213 10 2,39,223 (ii) Required Reserves [including both change in NDTL and CRR] -55,613 76,450 -25,190 40,865 15,675 (iii) Term Repo Auctions - 1,82,964 25,731 - 25,731 Memo Item (i) Long term Forex Swaps Buy/Sell (+)/ Sell/Buy (-) - 2,19,245^ - - - (ii) Net Absorption (+)/ Injection (-) as at end-period 84,651 -172 3,07,793 56,274 56,274 Note: 1. (+) / (-) sign suggests accretion/depletion in banking system liquidity. 2. Data pertains to the last Friday of the respective period. 3. *: Data for Q2 and H1:2025-26 are up to September 26, 2025. 4. ^: approximate values. Source: RBI. 5599Monetary Policy Report October 2025 rates hovered near the floor of the LAF corridor Table IV.2: Reserve Bank’s Liquidity Measures amidst large surplus liquidity, the Reserve Bank since January 2025 resumed VRRR auction on June 27, 2025, after a gap Period Liquidity Measures Amount Injected (in ₹ crore) of nearly eight months. Since then, the Reserve Bank Q4:2024-25 a. OMO purchases (6) 2,44,561 has conducted 23 VRRR auctions of maturity ranging b. Term VRRs (3) 1,82,964 c. Forex Swaps (3) 2,19,245* from overnight to 8-days. In general, the auctions April 2025 a. OMO purchases (5) 1,20,000 elicited better response from banks, with an average b. Term VRR (1) 25,731 offer-cover ratio of 0.83, compared to the response May 2025 a. OMO purchases (4) 1,19,203 received in VRR auctions (Chart IV.2b). When the Total 9,11,704* banking system faced transient liquidity tightness Note: Figures in parentheses denote number of auctions. *: Indicates aproximate value. due to tax related outflows on select days, thirteen Source: RBI. VRR auctions of overnight to 6-day maturity were also conducted in Q2:2025-26. The Reserve Bank The Reserve Bank remained nimble and agile in maintained sufficient liquidity in the banking system its liquidity management operations and ensured during H1 to meet the productive requirements of sufficient liquidity in the banking system to support the economy. transmission to money and credit markets. With liquidity conditions improving during H1:2025- As on September 26, 2025, reserve money expanded 26, the demand for transitory liquidity moderated by 4.5 per cent (y-o-y) as against 6.0 per cent a year since April 2025, as reflected in the low bid-cover ago. Adjusted for the CRR change, growth in reserve ratios in the daily VRR auctions (Chart IV.2a). Tepid money stood at 8.4 per cent (7.4 per cent a year response amidst sufficient surplus liquidity ago). The higher growth in reserve money reflected prompted the Reserve Bank to discontinue the daily the expansion in currency in circulation. As on VRR auctions effective June 11, 2025. As overnight September 19, 2025, growth in money supply (M3) Chart IV.2: Offer/Bid-cover Ratio and Banks’ Preference for Liquidity a. Liquidity Conditions and Bid-cover b. Bid/Offer-Co ver Ratio of Variable Ratio of Daily VRRs Rate Operations (Ratio, left scale; Per cent, right scale) (Ratio) 1.2 2.0 2.0 0.96 1.8 1.6 1.5 1.0 (10) 1.4 1.0 0.76 0.73 1.2 0.5 0.8 0.63 (9) (1) 1.0 0.0 (3) 0.8 0.6 0.6 -0.5 0.36 0.53 00 .. 24 -1.0 0.4 0.32 (11) (5) 0.0 -1.5 (27) 0.2 0.01 0 (1) 0 0.0 Overnight 2-3 4-6 7-8 14 Tenor Net LAF to NDTL (RHS) Bid Cover ratio Variable rate repo Variable rate reverse repo Note: Figures in parentheses indicate number of operations. Source: RBI. 60 5202 ,61 naJ 5202 ,22 naJ 5202 ,72 naJ 5202 ,13 naJ 5202 ,6 beF 5202 ,21 beF 5202 ,81 beF 5202 ,42 beF 5202 ,30 raM 5202 ,70 raM 5202 ,31 raM 5202 ,81 raM 5202 ,12 raM 5202 ,62 raM 5202 ,20 rpA 5202 ,80 rpA 5202 ,61 rpA 5202 ,32 rpA 5202 ,92 rpA 5202 ,60 yaM 5202 ,31 yaM 5202 ,91 yaM 5202 ,32 yaM 5202 ,92 yaM 5202 ,40 nuJ 5202 ,01 nuJ 5202 ,61 peS 5202 ,22 peS 5202 ,52 peSChapter IV Liquidity Conditions and Financial Markets decelerated to 9.2 per cent (y-o-y) from 10.4 per to a lesser extent than short-term yields, in response cent a year ago primarily reflecting a deceleration to domestic developments and global cues. Equity in aggregate deposit growth. The money multiplier markets remained buoyant, despite bouts of volatility increased to 5.8 as on September 19, 2025, from 5.6 a amidst tariff related uncertainty. The Indian rupee year ago, reflecting the impact of the CRR cut. traded with a depreciating bias against the US dollar in H1 but remained amongst the least volatile major IV.2 Domestic Financial Markets EM currencies. Overall, monetary policy, along Domestic financial markets remained resilient and with liquidity easing measures, has contributed to relatively stable. Money market rates evolved in favourable financial conditions by influencing both sync with the policy rate trajectory and transition money and bond markets (Box IV.2). In the credit in system liquidity. Long-term government bond market, growth in bank credit has witnessed an yields eased during the current easing cycle, albeit uptick in the recent months. Box IV.2: Impact of Monetary Policy Surprises on Financial Conditions Monetary policy primarily influences short-term long-difference specification with lagged controls interest rates in an economy through changes in the (Jordà and Taylor, 2025)3: policy rate. Its impact on the real economy, however, y α βhmps γh y ε; for h (1) is routed through the changes in overall financial t h t t conditions across market segments. Therefore, the w Δh+er =e y + y – + y Δis t-1h +e cut mulat ∈iv e {0 c ,h 1a ,2n ,…ge , Nin } FCI t h t h t- effectiveness of monetary policy can be gauged from over a window of h days, mps is the policy shock at Δ + = + 1 t its effect on financial conditions. Accordingly, to time t and βh traces the cumulative change in FCI over examine the impact of monetary policy shocks on a window of h days following the policy shock. overall financial conditions in the Indian context, Related literature also suggests asymmetric impact a high-frequency financial conditions index (FCI), of monetary policy on financial market indicators. based on select indicators from money, government Financial frictions, credit constraints, and time-varying securities (G-sec), corporate bond, equity, and forex risk premia are some of the potential drivers of this markets is used (Bandyopadhyay et al., 2025). In the asymmetric impact. To test the differential impact of extant literature, it is common to use high-frequency monetary policy tightening vis-à-vis easing on financial interest rate changes around central bank policy conditions, equation (1) is modified as follows (Adrian announcements for identifying monetary policy et al., 2024): shocks. Following this approach, policy shocks are y α ρhmps mps- δhmps mps γh y ε (2) estimated as the first principal component of policy- t h t t t day changes in the Overnight Indexed Swap (OIS) rates w Δh+er =e m p +s a nd mt.ps- a +re in dicatt .or va+ r +ia bl e Δs t-o1 +c aptture t t of various maturities (Barakchian and Crowe, 2013; policy tigh+tening and easing, respectively. mps and t Nakamura and Steinsson, 2018).2 Further, to examine mps- take the value of 1 when mps is positive+ and t the response of FCI to monetary policy shocks, a local negative, respectively, and 0 otherwise. So, while δh t projections framework is employed for the sample traces the response for policy tightening, ρh traces the period January 2014 to August 2025 with the following response for policy easing. 2 OIS rates of 1, 3, 6, 9-month and 1-year maturities are used. 3 Jorda and Taylor (2025) show that local projections using the long difference specification considerably alleviates the problem of bias and autocorrelation in small samples. 6611Monetary Policy Report October 2025 The results indicate that a policy surprise equivalent à-vis easing as a positive shock is found to have a larger to a 100 basis points increase in the 1-year OIS rate is tightening impact on FCI than the easing impact of a associated with a 0.13 standard deviation tightening negative shock (Chart IV.2.1 b). This finding highlights in FCI over the week following the policy shock (Chart the need for judicious use of forward guidance and IV.2.1 a). Moreover, the findings also reaffirm the liquidity measures along with rate actions to reinforce asymmetric impact of monetary policy tightening vis- the effect of policy easing. Chart IV.2.1: Response to a Monetary Policy Surprise a. Unconditional Response b. Response to Tightening versus Easing (Standard Deviations of FCI) (Standard Deviations of FCI) Notes: The left chart plots the estimates of βh from (1) while the right chart plots the estimates of -ρh (to signify easing surprise) and δh (tightening surprise) from (2); Shaded areas represent the 90 per cent confidence bands constructed using Newey-West adjusted standard errors. Source: RBI Staff estimates. References: Barakchian, S. M., & Crowe, C. (2013). Monetary policy matters: Evidence from new shocks data. Journal of Adrian, T., Gelos, G., Lamersdorf, N., & Moench, E. Monetary Economics, 60(8), 950-966. (2024). The asymmetric and persistent effects of Fed policy on global bond yields. Bank for International Jordà, Ò., & Taylor, A. M. (2025). Local projections. Settlements, Working paper-1195. Journal of Economic Literature, 63(1), 59-110. Bandyopadhyay, P., Kumar, A., Kumar, P. and Nakamura, E. and Steinsson, J. (2018). High-Frequency Bhattacharyya, I. (2025), Financial Conditions Index Identification of Monetary Non-Neutrality: The for India: A High-frequency Approach. Reserve Bank Information Effect. The Quarterly Journal of Economics, of India Bulletin, June. https://rbi.org.in/Scripts/BS_ Volume 133, Issue 3, August 2018, pp.1283–1330, ViewBulletin.aspx?Id=23451 https://doi.org/10.1093/qje/qjy004 IV.2.1 Money Market near its floor during April to early July reflecting large surplus liquidity in the banking system. With VRRR During H1:2025-26, money market rates largely moved auctions absorbing surplus liquidity since end-June, in line with the policy repo rate and the evolving liquidity conditions. The weighted average call rate the WACR increased and traded closer to the policy (WACR) – the operating target of monetary policy rate since mid-July 2025.4 Generally, movements in – remained within the policy corridor and hovered the WACR reflected transient liquidity conditions, 4 The WACR moved close to the ceiling of the LAF corridor (MSF Rate) on July 23, 2025, mainly due to Goods and Services Tax outflows, causing liquidity strain. 62Chapter IV Liquidity Conditions and Financial Markets Chart IV.4: Money Market Rates and Policy Corridor (Per cent) 8.50 8.25 8.00 7.75 7.50 7.25 7.00 6.75 6.50 6.25 6.00 5.75 5.50 5.25 5.00 4.75 WACR Triparty repo rate Market repo rate 3-month CP rate 3-month CD rate 91-day T-bill rate SDF rate Repo rate MSF rate Sources: Financial Benchmarks India Pvt Ltd.; and RBI. 6633 42-voN-62 42-ceD-51 52-naJ-30 52-naJ-22 52-beF-01 52-raM-10 52-raM-02 52-rpA-80 52-rpA-72 52-yaM-61 52-nuJ-40 52-nuJ-32 52-luJ-21 52-luJ-13 52-guA-91 52-peS-70 52-peS-62 softening at the beginning of the month on higher government spending and hardening during the latter half due to tax outflows. The WACR showed better alignment with the policy repo rate in Q2:2025-26, with its spread over the policy repo rate narrowing to (-)8 bps compared to (-)17 bps in Q1 (Chart IV.3a). Volatility in the WACR, as measured by the exponential weighted moving average (EWMA)5, declined since April 2025 after remaining elevated in H2:2024-25 (Chart IV.3.b). Overnight rates in the collateralised segment, i.e., triparty repo and market repo, broadly moved in tandem with the WACR during H1:2025-26 (Chart IV.4.) Money market activity was dominated by the collateralised segments (tri-party and market repo), although their share in overnight money market Mutual funds remained major lenders in tri-party volume declined slightly to 97 per cent. Concomitantly, repo, with their share increasing by 2 percentage the uncollateralised segment, i.e., the call money market witnessed a modest increase in its share points to 68 per cent in H1:2025-26 from H2:2024- to above 3 per cent in September 2025. This could 25. However, in the market repo segment, the share be partly attributed to the extension of call money of mutual funds’ lending reduced to 40 per cent in market timings effective July 1, 2025 (Table IV.3). H1:2025-26 from 46 per cent in H2:2024-25. The share Chart IV.3: Policy Corridor and WACR a. Liquidity, Policy Corridor and b. Average Spread of WACR over Weighted Average Call Rate Repo Rate and Volatility (Per cent, left scale; ₹ Lakh Crore, right scale) (Basis points, left scale; Volatility [exponential weighted 7.50 4.5 moving average], right scale) 7.25 4.0 7.00 33 .. 05 6.75 2.5 6.50 2.0 6.25 1.5 6.00 01 .. 50 5.75 0.0 5.50 -0.5 5.25 -1.0 5.00 -- 21 .. 05 4.75 -2.5 4.50 -3.0 Net liquidity surplus (+)/deficit (-) (RHS) Weighted average call rate Standing deposit facility rate Repo rate Spread (In absolute terms) Marginal standing facility rate Exponential weighted moving average (RHS) Sources: RBI; and RBI staff calculations. 42-tcO-91 42-voN-70 42-voN-62 42-ceD-51 52-naJ-30 52-naJ-22 52-beF-01 52-raM-10 52-raM-02 52-rpA-80 52-rpA-72 52-yaM-61 52-nuJ-40 52-nuJ-32 52-luJ-21 52-luJ-13 52-guA-91 52-peS-70 52-peS-62 20 20 0.10 18 15 0.08 15 13 12 11 0.06 10 7 6 6 0.04 5 5 0.02 2 1 0 0.00 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guA 52-peS 5 EWMA is an improvement over simple variance as it assigns greater weight to more recent observations. EWMA expresses volatility as a weighted average of past volatility with higher weights assigned to more recent observations.Monetary Policy Report October 2025 (CP) and certificates of deposit (CDs) declined by around 150 bps from end-March 2025 to end-August 2025, larger than the policy rate reduction of 100 bps since February. The average spread of CDs and CPs over the policy repo rate also narrowed substantially to 36 bps and 59 bps, respectively, in H1:2025-26 from 91 bps and 105 bps, respectively, in H2:2024-25. The average spread of treasury bills (T-Bills) over the policy repo rate turned negative, amidst ample liquidity in the banking system (Chart IV.4). Fresh issuances of CDs declined to ₹4.8 lakh crore of foreign banks’ lending in market repo also declined in H1:2025-26 from ₹6.6 lakh crore in H2:2024-25, reflecting the narrowing of the wedge in deposit and to 29 per cent from 31 per cent during the same period. On the borrowing side, public sector banks (PSBs) credit growth. Tenor-wise, CD issuances in the shorter remained the major players in tri-party repo, although tenor (up to 91-day) increased on account of declining their share reduced to 28 per cent in H1:2025-26 from interest rate. There was a concomitant decline in 40 per cent in H2:2024-25. During the same period, longer tenor issuances (Table IV.4). The issuances of the share of private sector banks increased to 28 per CPs in the primary market increased to ₹8.8 lakh crore cent from 22 per cent. PSBs had a relatively smaller during H1:2025-26 from ₹8.2 lakh crore in H2:2024-25 presence in market repo, with their share remaining (Chart IV.5a). The money market risk premia (spread steady at 6 per cent over the same period. of 3-month CP rate over 91-day T-bills rate) declined in July but increased subsequently in August, broadly The term segments of the money market witnessed faster monetary policy transmission aided by surplus tracking the movement in the policy uncertainty liquidity conditions. The rates on commercial paper index (Chart IV.5.b). Chart IV.5: Primary Issuances of Commercial Paper a. System Liquidity, Issuances and WADR b. Commercial Paper Spread and Policy Uncertainity (₹ Lakh Crore, left scale; Per cent , right scale) (Percentage points, left scale; Index, right scale) 4 7.8 7.6 3 7.4 2 1.6 13 .051.421.271.151.151.50 1.091.461.85 1.63 1.301.601.53 1.181.607.2 7.0 1 6.8 0 6.6 -1 6.4 6.2 -2 6.0 -3 6.25 5.8 Average daily liquidity surplus (+)/deficit(-) Issuance Spread of 3 Month Commercial Paper over 91-Day Treasury-bill Weighted average discount rate India Policy Uncertainty Index Note: Net liquidity adjustment facility represents absorption (through SDF and VRRR) net of injection (through MSF and VRR). Sources: RBI; Clearing Corporation of India Limited F-TRAC; www.policyuncertainty.com; and RBI staff estimates. 64 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guA 52-peS 1.3 180 1.2 160 1.1 1.0 123.22 140 0.9 120 0.8 0.7 100 0.6 0.73 80 0.5 0.4 60 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guA 52-peS Table IV.3: Average Volume and Share in Overnight Money Market (₹ Lakh Crore) 2024-25 2025-26 H1 H2 Q1 Q2* H1* Call/Notice 0.10(2.1) 0.11(2.2) 0.15(2.7) 0.16(2.9) 0.16(2.8) Triparty Repo 3.30(68) 3.62(70) 3.70(66) 3.67(66) 3.68(66) Market Repo 1.48(30) 1.42(28) 1.74(31) 1.71(31) 1.73(31) Total 4.88(100) 5.16(100) 5.59(100) 5.54(100) 5.57(100) Notes: 1. Figures in parentheses denote share of each segment in overnight money market. Figure may not add up to total due to rounding off. 2. *: Up to September 26, 2025. Sources: Clearing Corporation of India Ltd.; and RBI.Chapter IV Liquidity Conditions and Financial Markets Table IV.4: Tenor wise Break up for CD Issuances Chart IV.6: Issuer Profile of Commercial Paper (₹ Lakh Crore) (₹ Lakh Crore) 2.0 2024-25 2025-26 1.8 H1 H2 Q1 Q2* H1* 1.6 Up to 91 Days 3.93(73) 3.74(57) 1.95(83) 1.55(64) 3.50(74) 1.4 92-180 Days 0.20(4) 0.17(3) 0.11(5) 0.34(14) 0.45(9) 1.2 1.0 181-365 Days 1.22(23) 2.64(40) 0.28(12) 0.53(22) 0.81(17) 0.8 Total 5.35(100) 6.56(100) 2.34(100) 2.42(100) 4.76(100) 0.6 Notes: 1. Figures in parentheses denote share of each maturity profile. 0.4 2. Figure may not add up to total due to rounding off. 0.2 3. *: Up to September 26, 2025. Sources: Clearing Corporation of India Limited; and RBI staff estimates. 0.0 With favourable interest rates incentivising market- Financial institutions Corporates based financing, corporates dominated the CP Housing finance companies NBFCs Limited Liability Partnership primary market, with an average share of 48 per cent Sources: RBI; Clearing Corporation of India Limited F-TRAC; and RBI staff estimates. for H1:2025-26. The average share of non-banking financial companies (NBFCs), however, reduced to 29 IV.2.2 Government Securities (G-sec) Market per cent in H1:2025-26 from 33 per cent in H2:2024- The Government Securities (G-sec) market remained 25. It could be partly attributed to the reversal of risk broadly resilient, albeit volatile during H1:2025-26 weights on bank lending to NBFCs effective from amidst favourable domestic outlook but a challenging April 1, 2025, improving the overall credit availability global environment. The 10-year G-sec yield moved to NBFCs (Chart IV.6). In terms of maturity profile, in the range of 6.19 - 6.77 per cent during H1:2025- the 91-180 days segment had the largest share (51 26 (up to September 26, 2025). At the beginning of per cent) in fresh CP issuances, followed by the 31-90 H1, yields softened reflecting the reduction in the days segment (Table IV.5). policy repo rate, change in the policy stance from neutral to accommodative, open market operation Table IV.5: Maturity Profile of CP Issuances (OMO) purchases by the Reserve Bank, and softening (₹ Lakh Crore) Tenor H2: 2023-24 H1: 2024-25 H2: 2024-25 H1: 2025- crude oil prices. Yields declined further in May and 26* early June, driven by lower-than-expected April CPI 7- 30 days 0.48(7) 0.63(8) 0.51(6) 0.42(5) inflation print, market expectations of a rate cut in 31-90 days 2.32(35) 2.35(31) 2.33(28) 3.06(35) June, continued OMO purchases by the Reserve Bank 91-180 days 3.11(47) 3.94(52) 4.24(52) 4.54(51) and record surplus transfer from the Reserve Bank to 181-365 days 0.77(12) 0.64(8) 1.11(14) 0.82(9) the Government of India. Total 6.67(100) 7.55(100) 8.19(100) 8.84(100) G-sec yields firmed up post the June policy Outstanding 3.89 3.98 4.43 4.89 (as at end- announcement, as the change in stance from period) ‘accommodative’ to ‘neutral’ diminished market Notes: 1. Figures in parentheses denote share of each maturity profile. Figure may not add up to total due to rounding off. expectations of a deeper rate cut cycle. After 2. *: Up to September 26, 2025. Sources: Clearing Corporation of India Limited F-TRAC; and RBI. remaining broadly stable in the first half of July, 6655 32-nuJ 32-peS 32-ceD 42-raM 42-nuJ 42-peS 42-ceD 52-raM 52-nuJ 52-peSMonetary Policy Report October 2025 Chart IV.7: 10-year Par Yield, Repo Rate and Liquidity Conditions (Per cent, left scale; ₹ lakh crore, right scale) 8.00 5.0 4.5 7.75 Fiscal concerns due to GST 4.0 7.50 rationalisation Higher GDP growth 3.5 7.25 Retention of credit ratings 7.00 Lower CPI Print Rise in CPI print 3.0 Change in policy stance 2.5 6 66. ..7 255 50 Lo w e r C PI P r in t R isi n g g eo - p o l iti c a l ten s i o n lo w er U S lab o u r m a r k et da t a 112 ... 050 6.00 Rise in US yields 0.5 Reduced GDP numbers tracking declin e in US 5.75 expectation of rate cut and buyback yields/crude oil price 0.0 5.50 announcements -0.5 5.25 -1.0 Total liquidity (RHS) 10-year par yield Repo rate Sources: RBI; and Financial Benchmarks India Pvt. Ltd. G-sec yields began to harden in the second half tenor and hardened at the longer end in September amidst uncertainty surrounding the US trade (Chart IV.8). deals and rise in crude oil prices. In August, yields The average trading volume in G-secs and T-bills continued to harden, tracking movements in US increased in H1:2025-26 relative to H2:2024-25 (Chart yields and heightened trade uncertainties from IV.9). The weighted average yield (WAY) on traded the imposition of additional tariffs on India. maturities for G-secs and T-bills declined by 38 bps and Yields softened briefly on S&P’s upgrade of India’s 89 bps, respectively, in H1 as compared to H2:2024-25. sovereign ratings on August 14, 2025 but rose again on fiscal concerns stemming from lower growth in direct tax collections and rationalisation of GST rates (Chart IV.7). Beginning September, yields have eased on receding fiscal concerns, softening US yields and declining crude oil prices. The yields on T-bills softened during April and May amidst the policy repo rate cut and large surplus liquidity. The higher-than-expected repo rate cut and persistent surplus liquidity led to further moderation in yields in June. Yields hardened in August amidst the uncertainty on the interest rate trajectory with the MPC maintaining status quo on both rate and stance, and liquidity absorption by the Reserve Bank that raised short-term rates. T-bill rates softened at the short end till the three-month 66 52-rpA-20 52-rpA-70 52-rpA-21 52-rpA-71 52-rpA-22 52-rpA-72 52-yaM-20 52-yaM-70 52-yaM-21 52-yaM-71 52-yaM-22 52-yaM-72 52-nuJ-10 52-nuJ-60 52-nuJ-11 52-nuJ-61 52-nuJ-12 52-nuJ-62 52-luJ-10 52-luJ-60 52-luJ-11 52-luJ-61 52-luJ-12 52-luJ-62 52-luJ-13 52-guA-50 52-guA-01 52-guA-51 52-guA-02 52-guA-52 52-guA-03 52-peS-40 52-peS-90 52-peS-41 52-peS-91 52-peS-42 Chart IV.8: FBIL T-Bill Benchmark Yield to Maturity (Per cent) 6.35 6.20 6.05 6.06 5.90 5.75 5.61 5.60 5.57 5.45 5.40 5.30 5.15 5.00 Tenor April 09, 2025 August 06, 2025 June 06, 2025 September 26, 2025 Source: Financial Benchmarks India Pvt. Ltd. syaD 7 syaD 41 htnoM 1 shtnoM 2 shtnoM 3 shtnoM 4 shtnoM 5 shtnoM 6 shtnoM 7 shtnoM 8 shtnoM 9 shtnoM 01 shtnoM 11 shtnoM 21Chapter IV Liquidity Conditions and Financial Markets Chart IV.9: Trading Volumes and Yield a. G-Sec b. T-Bills (₹ crore, left scale; Per cent, right scale) (₹ crore, left scale; Per cent, right scale) 80,000 7.22 7.5 8,000 7521 7.5 70,000 6.99 66971 7.0 6799 6445 6.78 6.96 6.77 5968 60,000 57427 53731 6.40 6.5 6,000 6.51 6.5 50,000 6.0 41041 40,000 5.5 4,000 5.62 5.5 30,000 5.0 20,000 4.5 2,000 4.5 10,000 4.0 0 3.5 0 3.5 H2:2023-24 H1:2024-25 H2:2024-25 H1:2025-26 H2:2023-24 H1:2024-25 H2:2024-25 H1:2025-26 Average daily volume Average daily volume Weighted average yield of traded maturities Weighted average yield of traded maturities Sources: Clearing Corporation of India Limited; and RBI staff estimates. The overall dynamics of the yield curve are captured 26 widened the term spread (Chart IV.10a), which is by its latent factors, viz., level, slope and curvature6. partly attributed to (i) demand-supply mismatches in Yields have declined at the short end, while they have the G-sec market; and (ii) shift in investment pattern hardened at the long end of the term structure. This of insurance companies, pension and provident funds bear steepening of the yield curve during H1:2025- from government bonds to equities and corporate Chart IV.10: G-Sec Yield Curve a. Shifts b. Changes in Level, Slope and Curvature (Per cent) (Basis points) 7.40 7.29 7.20 7.10 6.98 6.80 6.50 6.20 5.90 5.60 5.30 Mar 28 - Apr 08- June 05- Aug 05 - Cumulative Maturity in years Apr 08 June 05 Aug 05 Sept 26 (Mar 28 - Sept 26) Mar 28, 2025 April 09, 2025 June 06, 2025 August 06, 2025 September 26, 2025 Level Slope Curvature Sources: Financial Benchmarks India Pvt. Ltd; Clearing Corporation of India Limited; and RBI staff estimates. 6 The level is the average of par yields of all tenors up to 30-years published by FBIL and the slope (term spread) is the difference in par yields of 3-months and 30-year maturities. The curvature is calculated as twice the 15-year yield minus the sum of 30-year and 3-month yields. 6677 52.0 57.1 52.3 57.4 52.6 57.7 52.9 57.01 52.21 57.31 52.51 57.61 52.81 57.91 52.12 57.22 52.42 57.52 52.72 57.82 52.03 57.13 52.33 57.43 52.63 57.73 52.93 57.04 52.24 57.34 52.54 57.64 52.84 57.94 116 115 100 92 85 70 55 42 4442 40 28 24 25 16 18 17 10 6 6 2 -5 -9 -20 -24 -35Monetary Policy Report October 2025 bonds. The average level of yields increased by Government of India amounting to ₹1,29,697 crore 2 bps, while the slope of the yield curve steepened during H1:2025-26. Even as the weighted average by 116 bps (Chart IV.10b). The curvature, on the maturity of the outstanding stock of G-secs increased other hand, also increased by 92 bps, reflecting the from 13.24 years at end-March 2025 to 13.58 years as hardening bias in the mid-segment. In the Indian on September 26, 2025, the weighted average coupon context, the level and curvature of the yield curve are declined from 7.25 per cent to 7.21 per cent over the same period. During H1:2025-26, four buyback found to have more information content on future auctions were announced for an aggregate amount macroeconomic outcomes than the slope owing to of ₹1.06 lakh crore with a view to retiring some of market segmentation, unlike in AEs (Patra et al, 2022)7. the Government of India’s debt, in the backdrop of Cross-country evidence broadly suggests that G-sec improved cash position. The market response to the yields have not declined proportionately to the auctions was modest with the Reserve Bank accepting changes in policy rate by central banks during the offers aggregating to only ₹0.87 lakh crore against the current easing cycle, although there are variations notified amount of ₹1.06 lakh crore. across countries. These variations reflect varying The weighted average spread of cut-off yields on state initial conditions, heterogeneous impact of trade government securities over G-sec yields of comparable and geopolitical uncertainties on macroeconomic maturities was 38 bps in H1:2025-26 (up to September conditions and the outlook, inflation expectations 26) (Chart IV.12) as against 30 bps in H2:2024-25. The and investor sentiment across countries (Chart IV.11). average inter-state spread on securities of 10-year As part of active debt consolidation, the Reserve Bank tenor (fresh issuances) was 5 bps in H1:2025-26 (up to conducted seven switch auctions on behalf of the September 26) as against 4 bps in H2:2024-25. Chart IV.11: Changes in Policy Rate and 10-year Yields (Basis points) 50 39 16 20 -10 -0.3 -- 74 00 -41 -35 -56 -46 -24 -100 -75 -75-82 -100 -100 -130 -125 -160 -190 -166 -220 -250 -250 -280 -310 -340 -370 -400 -400 -430 Change in policy rate Change in yield 7 Patra, M.D., Joice, J., Kushwaha, K.M., and I. Bhattacharyya (2022), “What is the Yield Curve telling us about the Economy?”, Reserve Bank of India Bulletin, June. 68 SU aerA oruE KU aisyalaM ocixeM dnaliahT aisenodnI aissuR aidnI 35,000 67 62 30,000 57 25,000 52 47 20,000 42 37 15,000 32 27 10,000 22 5,000 17 12 0 7 rpA-30 rpA-80 rpA-51 rpA-22 rpA-92 yaM-60 yaM-31 yaM-02 yaM-72 nuJ-30 nuJ-01 nuJ-71 nuJ-42 luJ-10 luJ-80 luJ-51 luJ-22 luJ-92 guA-50 guA-21 guA-91 guA-62 peS-20 peS-90 peS-61 peS-32 Chart IV.12: State Government Securities - Amount Raised and Spread (₹ crore, left scale; Basis points, right scale) Total accepted amount Cumulative weighted average spread (RHS) Source: Bloomberg; CEIC; and RBI Staff estimates. Source: Financial Benchmarks India Pvt. Ltd.Chapter IV Liquidity Conditions and Financial Markets IV.2.3 Corporate Bond Market 26 and uncertainty about the growth outlook (Table IV.6). The average 3-year credit default swap spreads Corporate bond yields declined tracking softening of (trading overseas for the State Bank of India and ICICI G-sec yields while spreads exhibited a mixed trend Bank) increased by 5 bps and 3 bps, respectively, in during H1:2025-26 (up to September 25). Issuer-wise, H1:2025-26 (up to September 26) over H2:2024-25. the average yield on AAA-rated 3-year bonds of public sector undertakings (PSUs), financial institutions Primary issuances of listed corporate bonds in (FIs) and banks softened by 62 bps (to 6.86 per cent), domestic markets increased to ₹4.0 lakh crore while those of non-banking financial companies during H1:2025-26 (up to August 2025) from ₹3.3 lakh crore during the corresponding period of the (NBFCs) and corporates declined by 56 bps (to 7.15 previous year due to favourable cost conditions per cent) and 50 bps (to 7.12 per cent), respectively, engendered by monetary policy easing (Chart IV.14a). in September 2025 (up to September 25) over March Overseas issuances declined significantly to ₹3,243 2025 (Chart IV.13a). The average bond market risk crore during H1:2025-26 (up to August 2025) from premium (i.e., the spread of 3-year AAA corporate ₹23,014 crore during the same period last year bond yields over 3-year G-sec yields) reduced from amidst conducive environment for raising resources 83 bps to 79 bps for PSUs, FIs and banks; while it in domestic markets. Almost the entire resource increased from 106 bps to 108 bps for NBFCs; and mobilisation in the corporate bond market (i.e., 98.9 from 98 bps to 105 bps for corporates in H1:2025- per cent) was through the private placement route 26 (in September 2025 over March 2025), amidst in H1 (up to August 2025). Outstanding investments mixed corporate earnings results for Q1:2025-26 by foreign portfolio investors (FPIs) in corporate (Chart IV.13b). bonds stood at ₹1.29 lakh crore as on September The risk premia generally moderated for higher 26, 2025 as against ₹1.21 lakh crore at end-March rated bonds, while it widened for lower rated bonds 2025, with the utilisation of investment limits amidst mixed corporate performance in Q1:2025- declining marginally to 15.7 per cent from 15.8 per Chart IV.13: AAA-rated 3-Year Corporate Bond Yield and Spreads a. Yield b. Spread (Per cent) (Basis points) 8.5 8.0 7.20 7.5 7.12 7.0 6.5 6.86 6.0 5.98 5.5 5.0 NBFCs Corporates PSUs, FIs & Banks 3-Yr G-sec NBFCs PSUs, FIs & Banks Corporates Note: Chart 1b plots monthly average spreads over G-secs. Data is up to September 25, 2025. Source: Fixed Income Money Market and Derivatives Association of India. 6699 42-rpA-10 42-rpA-12 42-yaM-11 42-yaM-13 42-nuJ-02 42-luJ-01 42-luJ-03 42-guA-91 42-peS-80 42-peS-82 42-tcO-81 42-voN-70 42-voN-72 42-ceD-71 52-naJ-60 52-naJ-62 52-beF-51 52-raM-70 52-raM-72 52-rpA-61 52-yaM-60 52-yaM-62 52-nuJ-51 52-luJ-50 52-luJ-52 52-guA-41 52-peS-30 52-peS-32 130 120 110 108 100 105 90 80 70 79 60 50 40 30 20 10 0 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guA 52-peSMonetary Policy Report October 2025 Table IV.6: Financial Markets - Rates and Spread Interest Rates Spread (bps) (Per cent) (over corresponding risk-free rate) Instrument September 2024 March 2025 September 2025 September 2024 March 2025 September 2025 1 2 3 4 5 6 7 Corporate Bonds (i) AAA (1-yr) 7.92 7.76 6.67 117 115 98 (ii) AAA (3-yr) 7.80 7.62 7.12 97 98 105 (iii) AAA (5-yr) 7.70 7.60 7.21 86 89 86 (iv) AA (3-yr) 8.55 8.43 8.21 172 178 215 (v) BBB-minus (3-yr) 12.14 12.09 11.89 531 544 583 Note: Yields and spreads are computed as monthly averages. Data is up to September 25, 2025. Source: Fixed Income Money Market and Derivatives Association of India. cent (Chart IV.14b). Secondary market activity picked IV.2.4 Equity Market up, with trading volume at ₹10.1 lakh crore during During H1:2025-26 so far (up to September 26), H1:2025-26 (up to August 2025) vis-à-vis ₹6.3 lakh Indian equity markets remained on an upward crore during the corresponding period last year trajectory, despite bouts of volatility amidst trade (Chart IV.14c). policy uncertainty and geopolitical tensions. After Chart IV.14: Corporate Bond Market Activity a. Domestic and Overseas Issuances b. FPI Investments in Corporate Bonds (₹ lakh crore) (₹ lakh crore, left scale, Per cent, right scale) 6 5.3 5 4.9 4.6 4.6 3.9 4.0 4 3 2 1 0.2 0.1 0.3 0.3 0.3 0.0 0 Domestic Overseas Total investment % of limit utilised c. Secondary Market Turnover (₹ lakh crore) *: Data is up to August 2025. Sources: Securities and Exchange Board of India; National Securities Depository Limited; and Prime Database. 70 32-2202 :2H 42-3202:1H 42-3202 :2H 52-4202 :1H 52-4202:2H *62-5202 :1H 1.4 1.29 18.0 1.2 1.03 1.08 1.18 1.21 17.5 1.0 17.0 0.8 16.5 0.6 16.0 0.4 0.2 15.5 0.0 15.0 32-peS-92 42-raM-82 42-peS-03 52-raM-82 52-peS-62 2.5 2.3 2.3 2.2 2.1 2.1 2.0 1.9 1.7 1.5 1.5 1.6 1.5 1.3 1.4 1.4 1.4 1.2 1.1 1.0 1.0 0.5 0.0 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guAChapter IV Liquidity Conditions and Financial Markets an initial decline, markets recovered in April as September amidst a steep hike in H1B visa fees and tariff-pause announcements by the US and low reports of fresh tariffs by the US. domestic CPI inflation print for March 2025 lifted Overall, the BSE Sensex increased by 3.9 per cent sentiments. Markets again came under pressure with in H1:2025-26 (up to September 26). The broader the escalation of India-Pakistan conflict in early May, market indices outperformed the benchmark during but rose sharply thereafter in mid-May, following H1, with the BSE MidCap and BSE SmallCap index the announcement of a ceasefire agreement and gaining by 7.7 per cent and 12.1 per cent, respectively a record surplus transfer by the Reserve Bank to (Chart IV.15a). India Volatility Index, a measure of the Government of India. The rally continued in short-term expected volatility of Nifty 50, declined by June aided by the front loading of monetary policy 10.2 per cent during the same period. All BSE sectoral easing by the Reserve Bank, although a rise in geo- indices, except BSE Information Technology Index political tensions in the Middle-East led to some registered gains during the period (Chart IV.15b). correction. In July, markets underperformed other global markets amidst amplified tariff uncertainty After remaining net buyers in Q1:2025-26, FPIs and mixed corporate earnings results for Q1:2025-26. turned net sellers in Q2. The Domestic Institutional Equity markets gained in mid-August amidst India’s Investors (DIIs), especially mutual funds, acted as a sovereign rating upgrade by a major global credit counterbalancing force by remaining net buyers and rating agency and the announcement of GST reforms, provided resilience to the Indian equity markets. before negative global cues contributed to market The inflows into mutual funds have been supported losses in late-August. Investor sentiment revived in by sustained and expanding reach of systematic early-September, buoyed by the release of higher- investment plans (SIPs). Average monthly contribution than-expected GDP growth data for Q1:2025-26 and to mutual funds through the SIP route increased to strong manufacturing and services PMI data releases. ₹27,464 crore in H1:2025-26 (up to August) as against However, markets declined in the second half of ₹25,905 crore during H2:2024-25 (Chart IV.16). Chart IV.15: Stock Market Performance a. Benchmark and Broad Indices Performance Index (End-March 2025 = 100) 120 112.1 115 110 107.7 105 103.9 100 95 90 85 80 BSE Sensex BSE MidCap BSE SmallCap Source: Bloomberg. 7711 52-raM-82 52-rpA-70 52-rpA-71 52-rpA-72 52-yaM-70 52-yaM-71 52-yaM-72 52-nuJ-60 52-nuJ-61 52-nuJ-62 52-luJ-60 52-luJ-61 52-luJ-62 52-guA-50 52-guA-51 52-guA-52 52-peS-40 52-peS-41 52-peS-42 b. Performance of BSE Sectoral Indices (Per cent) 30 25 24.0 20 15 12.613.314.5 1 50 1.41.71.93.13.63.94.35.26.36.36.86.96.97.09.0 0 -5 -10 -7.7 ygolonhceT noitamrofnI seitilitU rewoP ytlaeR xeknaB GCMF erachtlaeH ygrenE saG & liO lateM secivreS laicnaniF moceleT elbaruD remusnoC USP noitacinummoC sdooG latipaC slairtsudnI secivreS yranoitercsiD remusnoC otuAMonetary Policy Report October 2025 through public issues aggregated to ₹4,430 crore (i.e., Chart IV.16 Average Resource Mobilisation in SIPs about 2.4 per cent of the total primary issuances) (₹ crore) 30,000 27,464 during H1 (up to August 2025) as against ₹4,664 crore 25,905 in H2:2024-25. 25,000 22,321 IV.2.5 Foreign Exchange Market 18,151 20,000 15,052 The global foreign exchange market experienced 13,623 15,000 12,372 11,352 increased volatility during April–September 2025, 9,409 10,000 reflecting shifts in US policy expectations, evolving trade frictions, and fluctuating risk sentiments. The 5,000 US dollar, after reflecting weakness in early 2025, 0 remained range-bound with intermittent bouts of volatility, mirroring the uncertainties around trade, fiscal, and monetary policy trajectories in *: Up to August 2025. the US. In this environment, while most emerging Source: Association of Mutual Funds of India. market (EM) currencies recorded appreciations, the Overall, FPIs were net sellers (₹0.7 lakh crore up Indian rupee (INR) exhibited two-way movements to September 26) while DIIs were net buyers (₹3.7 with a depreciating bias. After trading with an lakh crore up to September 26) in the equity market appreciating bias during April and early May 2025, during H1:2025-26 (ChartIV.17a.). Resource the INR depreciated in June-September due to the mobilisation in primary equity markets stood at ₹1.8 escalation in the US-India trade tensions, widening lakh crore during H1:2025-26 (up to August 2025) as trade deficit and FPI outflows (Chart IV.18a). The against ₹2.2 lakh crore in H2:2024-25 (Chart IV.17b). INR also experienced higher volatility in Q1 as The amount raised by small and medium enterprises reflected by the option-implied volatility as well as 72 22-1202:1H 22-1202:2H 32-2202:1H 32-2202:2H 42-3202:1H 42-3202:2H 52-4202:1H 52-4202:2H *62-5202:1H Chart IV.17: Institutional Investments and Resource Mobilisation a. Net Investment in Indian Equities by b. Resource Mobilisation in Equity Markets Institutional Investors (₹ lakh crore, left scale; ₹ crore, right scale) (₹ lakh crore) 1.0 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 Note: IPO: Initial Public Offer. QIP: Qualified Institutional Placement. FPO: Follow-on Public Offer. *: Up to September 26; ^: up to August 2025. Sources: Capitaline; National Securities Depository Limited; and Securities and Exchange Board of India. 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guA *52-peS 2.2 6,000 2.0 1.8 5,103 4,664 5,000 1.6 4,430 1.4 3,666 4,000 1.2 3,000 1.0 2,456 0.8 2,000 0.6 1,419 0.4 1,000 914 0.2 0.0 0 QIPs & Preferential allotment IPOs, FPOs & Rights DIIs FPIs of which: SME IPOs/ FPOs (RHS) 32-2202:1H 32-2202:2H 42-3202:1H 42-3202:2H 52-4202:1H 52-4202:2H ^62-5202:1HChapter IV Liquidity Conditions and Financial Markets Chart IV.18: Indian Rupee and Volatility a. Movements of Indian Rupee, US Dollar b. 1-Month At-the-Money Implied Volatility and and EM currency Index GARCH Volality (Index (March 31, 2025 = 100), left scale; (Per cent) Index (March 31, 2025 = 100), right scale) 8 7 6 5 4.4 4 3.5 3 2 1 0 ₹/US$ Emerging market currency index (RHS) US DXY (RHS) 1-Month At-the-Money (ATM) Implied Volatility GARCH Note: An increase (decrease) in the index denotes currency appreciation (depreciation). Sources: Financial Benchmarks India Pvt. Ltd.; Refinitiv Eikon; Bloomberg and Authors’ calculation. GARCH8 estimates, but volatility moderated in The decline was moderate for longer maturities, as August as global risk sentiment stabilised and the 12-month premia declined modestly to 2.11 per markets priced in trade-related risks (Chart IV.18.b). cent in H1 (up to September 26) from 2.25 per cent in Notwithstanding these movements, the INR remained H2:2024-25. among the least volatile EM currencies during this The 40-currency real effective exchange rate (REER) period, supported by strong fundamentals as evident of the INR depreciated by 2.6 per cent between March from a narrower current account deficit, steady 2025 and August 2025 in line with the movement services exports, resilient private remittances and robust foreign exchange reserves. The INR depreciated by 3.5 per cent against the US dollar on September 26 over end-March 2025, as opposed to the appreciating trends registered by several peer EM currencies (Chart IV.19). A few peer EM currencies like Argentine peso and Turkish lira however, recorded higher depreciation than INR during this period. Forward premia declined sharply at the beginning of H1:2025-26 and continued to ease till May 2025 but rose moderately thereafter (Chart IV.20). On an average, the 1-month forward premia eased to 1.94 per cent in H1 (up to September 26) from 2.51 per cent in H2:2024-25, in tandem with the narrowing interest rate differential between the US and India. 8 Generalised Autoregressive Conditional Heteroskedasticity (GARCH) 7733 42/tcO/10 42/tcO/52 42/voN/81 42/ceD/21 52/naJ/50 52/naJ/92 52/beF/22 52/raM/81 52/rpA/11 52/yaM/50 52/yaM/92 52/nuJ/22 52/luJ/61 52/guA/90 52/peS/20 52/peS/62 106 106 104 104 102 102 100 100 98 98 96 96 94 92 94 90 92 88 90 86 52/raM/82 52/rpA/11 52/rpA/52 52/yaM/90 52/yaM/32 52/nuJ/60 52/nuJ/02 52/luJ/40 52/luJ/81 52/guA/10 52/guA/51 52/guA/92 52/peS/21 52/peS/62 Chart IV.19: Movements in Major EM Currencies (Per cent) 11.5 10 6.8 5.1 5.5 5.7 5 1.7 0 -1.5 -1.1 -1.0 -0.4 -5 -3.5 -3.1 -5.8 -10 -8.3 -15 -20 -19.3 -25 September 26, 2025 over end-March 2025 Sources: Financial Benchmarks India Pvt. Ltd.; and Refinitiv Eikon. osep enitnegrA aril hsikruT YXD SU eepur naidnI gnod esemanteiV osep enippilihP osep naelihC haipur naisenodnI elbur naissuR nauy esenihC tiggnir naisyalaM thab dnaliahT dnar nacirfA htuoS laer nailizarB osep nacixeMMonetary Policy Report October 2025 Overall Financial Conditions Overall financial conditions eased beginning mid- March until July with a softening trend observed across the money, G-sec and corporate bond markets, as suggested by the financial conditions index based on twenty Indian financial market indicators9 at daily frequency. Since August, financial conditions tightened marginally on account of tightness in money and corporate bond markets (Chart IV.22). Overall financial conditions remain benign, auguring well for domestic economic activity, going forward. IV.2.6 Bank and Non-Bank Credit Bank Credit: Aggregate Trends in nominal effective terms (Chart IV.21a). The Growth in bank credit moderated in H1:2025-26, depreciation of INR’s 40-currency REER remained although the recent data shows signs of an uptick. modest relative to that of some major economies Across bank groups, credit growth of public sector (Chart IV.21.b). banks (PSBs) remained higher (11.4 per cent) than Chart IV.21: Trend in Real Effective Exchange Rate (REER) a. India's 40-Currency REER b. Cross Country Movement in REER (Per cent, left scale; Index [2015-16 = 100], right scale) (August 2025 over March 2025) 3 110 (Per cent) 2 106 1 102 98.8 0 98 -1 -1.3 -2 -1.4 94 -3 90 Relative Price Effect 40-Currency REER (RHS) Nominal Exchange Rate Effect Change in REER (m-o-m) Sources: RBI; and Bank for International Settlements. 9 The chosen indicators represent five market segments, namely (i) the money market; (ii) the G-sec market; (iii) the corporate bond market; (iv) the forex market; and (v) the equity market. For detailed methodology, refer to Bandyopadhyay, P., Kumar, A., Kumar, P. and Bhattacharyya, I. (2025), ‘Financial Condition Index for India: A High-frequency Approach’; Reserve Bank of India Bulletin, June. https://rbi.org.in/Scripts/BS_ViewBulletin.aspx?Id=23451 74 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guA 10 5 0 -2.6 -5 -10 -15 -20 anitnegrA yekruT SU anihC aidnI senippilihP napaJ aisenodnI acirfA htuoS dnaliahT KU eropagniS aisyalaM aissuR dnalreztiwS aerA oruE lizarB ocixeM Chart IV.20: Movements in INR-USD Forward Premia (Per cent) 4.5 4.0 3.5 3.0 2.5 2.3 2.2 2.0 2.1 2.2 1.5 1.0 0.5 1 month 3 months 6 months 12 months Source: Bloomberg. 42/tcO/10 42/tcO/52 42/voN/81 42/ceD/21 52/naJ/50 52/naJ/92 52/beF/22 52/raM/81 52/rpA/11 52/yaM/50 52/yaM/92 52/nuJ/22 52/luJ/61 52/guA/90 52/peS/20 52/peS/62Chapter IV Liquidity Conditions and Financial Markets Chart IV.22: Daily Financial Conditions Index for India (Standard deviation from average since 2012) 1.0 0.5 0.0 -0.5 -1.0 -1.5 Money Government securities Corporate bond Financial conditions index(standardised) Equity Foreignexchange Note: The financial conditions index provides a metric based on its historical average; in this context, a zero value corresponds to a financial system operating at the historical average level of all the financial indicators included in the index. To present the results, standardised index is used. Source: RBI staff estimates. that of private sector banks (PVBs) (9.4 per cent), while (y-o-y) as on September 19, 2025 from 13.0 per cent credit growth of foreign banks decelerated (Chart a year ago, although an uptick in momentum was IV.23a). On an annual basis (as on September 19, witnessed in Q2 (Chart IV.24). 2025), PSBs continued to account for the largest share The asset quality of SCBs improved during of the incremental credit and their share rose further 2025-26 (up to June 2025), with the overall gross vis-à-vis PVBs and foreign banks (Chart IV.23.b). non-performing assets (NPA) ratio declining to 2.3 Growth in non-food bank credit of scheduled per cent in June 2025 from 2.7 per cent a year ago commercial banks (SCBs) decelerated to 10.2 per cent (Chart IV.25a). Asset quality improved across all 7755 4202-01-10 4202-01-31 4202-01-52 4202-11-60 4202-11-81 4202-11-03 4202-21-21 4202-21-42 5202-10-50 5202-10-71 5202-10-92 5202-20-01 5202-20-22 5202-30-60 5202-30-81 5202-30-03 5202-40-11 5202-40-32 5202-50-50 5202-50-71 5202-50-92 5202-60-01 5202-60-22 5202-70-40 5202-70-61 5202-70-82 5202-80-90 5202-80-12 5202-90-20 5202-90-41 5202-90-62 Tighter conditions Easier conditions Chart IV.23: Credit flow across Bank Groups a. Growth b. Share in In cremental Credit (Per cent, y-o-y) (Per cent) 25 100 3.7 2.3 20 90 80 15 38.0 11.4 70 42.3 10 10.4 9.4 60 5 6.9 50 0 40 -5 30 59.7 54.0 -10 20 10 0 20-Sep-24 19-Sep-25 Public sector banks (including regional rural banks) Foreign banks Private banks (including small finance banks) All SCBs Public sector banks Private sector banks Foreign banks Source: RBI. 22-raM 22-nuJ 22-peS 22-ceD 32-raM 32-nuJ 32-peS 32-ceD 42-raM 42-nuJ 42-peS 42-ceD 52-raM 52-nuJ 52-peSMonetary Policy Report October 2025 cent in H1:2025-26 from 1.2 per cent in H2:2024- 25 (Chart IV.26a). The growth in adjusted non-food credit (i.e., non-food bank credit plus non-SLR investments by banks) was lower at 10.1 per cent in as on September 2025, as compared to 12.9 per cent in the previous year (Chart IV.26.b). As on August 22, 2025, excess holdings of statutory liquidity ratio (SLR) securities by SCBs decreased to 7.9 per cent of their net demand and time liabilities (NDTL) from 8.5 per cent at end-March 2025 (Chart IV.27). Excess SLR holdings are a component of the liquidity coverage ratio (LCR). They also provide collateral buffers to banks for availing funds under the LAF as well as wholesale funding in the triparty repo and market repo segments. major sectors, except the agriculture sector (Chart Bank Credit10: A Sectoral Perspective IV.25.b). Disaggregated trends in bank credit show moderation Growth in non-SLR investments of banks (comprising in credit growth across sectors. Although industrial investments in CPs, bonds, debentures, and shares credit softened, it remained modestly above its of public and private corporates) increased to 5.3 per historical 10-year average, with nascent signs of Chart IV.25: Stressed Assets and Non-Performing Assets of SCBs a. Overall Loan Portfolio of SCBs b. Sectoral Non -Performing Assets (Per cent) (Per cent) 10 9 8 7 6 5 4 3 2.8 2 2.3 Stressed assets ratio Non-performing assets ratio Source: RBI. 76 12-raM 12-nuJ 12-peS 12-ceD 22-raM 22-nuJ 22-peS 22-ceD 32-raM 32-nuJ 32-peS 32-ceD 42-raM 42-nuJ 42-peS 42-ceD 52-raM 52-nuJ 14 12 10 8 6 6.3 4 2.2 2 2.0 1.2 0 12-raM 12-nuJ 12-peS 12-ceD 22-raM 22-nuJ 22-peS 22-ceD 32-raM 32-nuJ 32-peS 32-ceD 42-raM 42-nuJ 42-peS 42-ceD 52-raM 52-nuJ Chart IV.24: Non-food Credit Growth of SCBs (Per cent) 20.0 6.5 17.5 5.0 10.2 15.0 3.5 2.0 12.5 0.5 10.0 -1.0 7.5 -2.5 5.0 -4.0 2.5 -5.5 0.0 -7.0 Momentum (RHS) Base effect (RHS) y-o-y growth rate Source: RBI; and Staff estimates. Agriculture Industry Retail loans Services 32-2202:2Q 32-2202:3Q 32-2202:4Q 42-3202:1Q 42-3202:2Q 42-3202:3Q 42-3202:4Q 52-4202:1Q 52-4202:2Q 52-4202:3Q 52-4202:4Q 62-5202:1Q 62-5202:2Q 10 Overall bank credit and non-food credit data are based on fortnightly Section-42 return, which covers all scheduled commercial banks (SCBs) while sectoral non-food credit data are based on sector-wise and industry-wise bank credit (SIBC) return, covering select banks accounting for about 95 per cent of the total outstanding non-food credit extended by all SCBs. Data pertain to the last reporting Friday of the month. Data include the impact of merger of a non-bank with a bank.Chapter IV Liquidity Conditions and Financial Markets growth uptick in recent months (Table IV.7). Despite Within the industrial sector, credit to MSMEs11 moderation in growth, personal loans and services segment continued to remain buoyant, with a sector credit remained the main drivers of overall significant acceleration in growth during recent bank credit growth (Chart IV.28 a and b). Agricultural months primarily contributing to its overall growth and allied activities registered muted credit growth, (Chart IV.29). Some regulatory measures such as with gradual firming up in recent months. revised guidelines on voluntary pledge of gold and silver jewellery as collateral for small business loans Chart IV.27: Excess SLR of Banks as well as the measures announced in the Union (Per cent of Net demand and time liabilities) 13 60 Budget helped in improving credit flow to the MSME segment. The revision in MSMEs classification, 50 11 wherein investment limits and turnover thresholds 40 34.7 9 have been raised substantially, also contributed 7.9 30 to high growth in the recent past. In contrast, 7 20 large industry credit registered tepid growth in 5 10 H1:2025-2612. 3 0 Among the major industrial sub-sectors, infrastructure sector credit growth has been on a declining path since last year, though there has Public sector banks Private banks been a marginal improvement since July 2025. On All SCBs Foreign banks (RHS) the other hand, credit to all engineering and textile *: Data up to August 22, 2025 Source: RBI. segments witnessed stable growth (Table IV.8). 11 Pertains to credit to micro, small and medium segments within industry. 12 H1:2025-26 data up to August 2025. 7777 22-1202 :1Q 22-1202 :2Q 22-1202 :3Q 22-1202 :4Q 32-2202 :1Q 32-2202 :2Q 32-2202:3Q 32-2202:4Q 42-3202 :1Q 42-3202 :2Q 42-3202:3Q 42-3202:4Q 52-4202:1Q 52-4202:2Q 52-4202:3Q 52-4202:4Q 62-5202:1Q *62-5202:2Q Chart IV.26: Non-SLR Investment and Adjusted Non-food Credit a. Non-SLR Investment b. Adjusted Non-Food Credit (₹ crore) (₹ lakh crore, left scale; Per cent, right scale) 40,000 9.0 17.5 7.5 10.1 15.0 12.5 30,000 6.0 10.0 4.5 7.5 20,000 3.0 5.0 1.5 2.5 10,000 0.0 0.0 0 2024-25 H1: 2024-25 H2: 2024-25 H1: 2025-26 Adjusted non-food credit (quarterly variation) Bonds/Shares/Debentures Commercial paper Y-o-Y adjusted non-food credit growth (RHS) Source: RBI. 42-3202:2Q 42-3202:3Q 42-3202:4Q 52-4202:1Q 52-4202:2Q 52-4202:3Q 52-4202:4Q 62-5202:1Q 62-5202:2QMonetary Policy Report October 2025 Table IV.7: Credit Growth (y-o-y, per cent) Sectors/Sub-Sectors Long- Post- Nov-23 Mar-24 Aug-24 Dec-24 Mar-25 Jul-25 Aug-25 Term* COVID** Bank Credit 10.9 15.0 20.7 20.2 13.6 11.2 11.0 10.0 10.0 Sectoral Deployment of Bank Credit Agriculture (13.2) 11.5 14.7 18.1 20.0 17.7 12.5 10.4 7.3 7.6 Industry (22.6) 4.2 7.9 6.1 8.5 9.7 7.2 7.7 6.0 6.5 Micro and small (5.1) 8.5 15.9 16.9 14.7 13.4 9.8 8.8 21.0 20.9 Medium (2.1) 12.9 19.1 12.0 13.3 19.2 19.9 18.6 14.7 13.1 MSMEs (7.2) 9.5 16.8 15.4 14.3 15.1 12.7 11.7 19.1 18.5 Large (15.5) 2.7 4.9 2.9 6.4 7.7 5.1 6.2 0.9 1.8 Infrastructure (7.5) 3.9 4.3 2.3 6.6 3.7 1.0 1.4 1.9 2.1 Services (29.1) 13.9 18.1 25.7 23.5 13.9 11.7 12.4 10.6 10.6 Services excluding NBFCs (20.2) 12.5 18.8 29.6 28.1 14.9 14.3 15.8 14.5 14.2 NBFCs (8.9) 19.0 17.2 18.9 15.3 11.9 6.7 5.7 2.6 3.4 Personal loans (35.1) 17.8 19.7 30.0 27.5 13.9 12.0 11.7 11.9 11.8 Personal loans with unchanged risk weight (23.8) 17.3 19.6 32.6 31.9 14.3 12.7 13.2 13.8 13.8 Housing (Including Priority Sector Housing) (17.6) 17.1 20.0 36.7 36.5 13.1 11.1 10.7 9.6 9.7 Vehicle loans (3.7) 18.1 15.4 20.6 17.6 14.5 8.8 8.6 8.9 8.7 Education (0.8) 8.1 16.4 23.0 23.7 18.4 15.8 15.1 15.0 14.6 Personal loans with increased risk weight (11.3) 19.2 20.1 25.3 19.7 13.2 10.7 8.6 8.1 7.9 Credit cards (1.6) 25.2 23.8 34.2 25.6 19.9 15.6 10.6 5.6 4.4 Other personal loans (8.7) 20.8 19.6 24.9 20.7 12.3 9.2 8.0 8.1 8.1 Notes: 1. Provisional data. 2. Bank credit data is based on fortnightly Section-42 return, which covers all scheduled commercial banks, while sectoral non-food credit data are based on sector-wise and industry-wise bank credit (SIBC) return, which covers select banks accounting for about 95 per cent of the total outstanding non-food credit extended by all SCBs, pertaining to the last reporting Friday of the month. 3. *: Average of growth from August 2015 to August 2025. 4. **: Average of growth from April 2022 to August 2025 5. Figures in parentheses against each sector denote share in total non-food credit as per the latest data. Source: RBI. Chart IV.28: Sectoral Deployment of Bank Credit a. Non-food Credit Growth: Sector-wise b. Contribution to Non-food Credit Growth (Per cent, y-o-y) (Percentage points) 20 18 16 14 12 11.8 10.6 10 9.9 8 7.6 6 6.5 4 Source: RBI. 78 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guA 15 10 4.1 5 3.1 1.5 1.0 0 Non-food credit Agriculture Industry Services Personal loans 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guA Agriculture Industry Services Personal loansChapter IV Liquidity Conditions and Financial Markets Chart IV.30: Credit Growth of Services Sector: Contribution of Major Sub-components (Percentage points) 16 12 10.6 8 4.8 1.1 4 1.4 0.5 2.8 0 Trade Professional services Commercial real estate NBFCs Other services* Services (per cent, y-o-y ) Note: *: Other services include all services excluding trade, professional services, commercial real estate and NBFCs. Source: RBI. Although growth of credit to the services sector average, with segments such as trade and commercial moderated during H1:2025-26, a gradual strengthening real estate recording healthy growth (Chart IV.30 and has been recorded in recent months (Chart IV.30). Tables IV.7 & IV.9). Non-banking finance companies (NBFCs) remained Credit growth in the personal loans segment remained the largest recipient of bank credit within the buoyant although decelerating from last year, with services sector, and there are signs of improvement housing and vehicle loans being the major contributors in credit to NBFCs following the withdrawal of the (Chart IV.31). In the backdrop of exuberant growth in additional risk weights w.e.f. April 01, 202513. On certain components of consumer credit, risk weights the other hand, credit to services excluding NBFCs were raised on unsecured personal loans in November expanded at a steady pace above its long-term 2023. This prudential measure contributed to a sharp Table IV.8: Credit Growth in Major Sub-sectors of Industry (y-o-y, per cent) Growth Aug-24 Sep-24 Dec-24 Mar-25 Jun-25 Jul-25 Aug-25 Infrastructure 3.7 2.1 1.0 1.4 -0.5 1.9 2.1 Basic metal and metal product 16.1 15.4 13.1 12.8 11.0 9.5 8.9 Textiles 6.4 5.4 5.6 8.3 8.6 6.0 6.4 Chemicals and chemical products 15.9 14.9 7.0 7.4 6.3 5.5 6.7 All engineering 16.6 15.7 19.5 22.1 22.3 23.1 19.9 Food processing 14.4 11.6 10.7 5.1 8.1 5.2 6.1 Low High Note: Within a row, darker shade of green pertains to acceleration in credit growth, while red indicates deceleration in credit growth. Source: RBI 13 https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT120A97A4D3CBCCE4AEBAAE1B7DB7DCF177D.PDF 7799 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guA Chart IV.29: Credit Growth of Industrial Sector: Contribution as per Size of Industries (Percentage points) 12 10 8 6.5 6 1.3 4 5.2 2 0 Source: RBI. 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guA MSMEs Large Industry (per cent, y-o-y)Monetary Policy Report October 2025 Table IV.9: Impact of Change in Risk Weights on Credit Growth (y-o-y, per cent) Growth Nov-23 Mar-24 Aug-24 Mar-25 Apr-25 May-25 Jun-25 Jul-25 Aug-25 Personal loans 25.3 19.7 13.2 8.6 9.7 8.2 7.9 8.1 7.9 (with change in risk weight) NBFCs (with change in risk weight)* 18.9 15.3 11.9 5.7 2.9 -0.3 2.6 2.6 3.4 Personal loans 32.6 31.9 14.3 13.2 12.9 12.6 13.6 13.8 13.8 (no change in risk weight) Services excluding NBFCs 29.6 28.1 14.9 15.8 14.4 13.3 12.4 14.5 14.2 (no change in risk weight) Low High Notes: 1. *Risk weights were restored for NBFCs in April 2025. 2. Within a row, darker shade of green pertains to acceleration in credit growth, while red indicates deceleration in credit growth. Source: RBI moderation, with growth in unsecured personal Though there has been a moderation in bank credit lending declining to about one-third of its level in growth, total credit to the economy remained resilient, November 2023. Personal loans with unchanged risk supported by strong non-bank intermediation. weights grew at a robust pace (Table IV.9). Housing Resource mobilisation by non-financial corporates loans, which constitute nearly half of the lending through market instruments such as corporate bond under personal loans, remained range bound while issuances and commercial papers has increased. growth of vehicle loans decelerated. The deceleration in bank credit growth, therefore, may be interpreted in the context of a broader and increasingly diversified credit ecosystem, wherein Chart IV.31: Personal Loans: Contribution of Major Sub-components non-bank channels have also emerged as key sources (Percentage points) of funding. 16 14 NBFCs Credit14 12 11.8 10 Despite some deceleration in lending, NBFCs' 5.7 8 credit growth remained strong at double-digit 6 0.9 levels. Industrial credit, which forms the dominant 0.2 4 portion of NBFCs' credit portfolio, displayed stable 5.0 2 growth, underscoring the importance of NBFCs 0 as a crucial conduit for extending credit to the economy. Lending to retail loans and services segments expanded at a healthy pace in H1:2025-2615 contributing to overall credit deployment by NBFCs (Chart IV.32). 14 Data on sectoral deployment of outstanding credit from select NBFCs pertain to last day of every month. As a pilot work, the collection of monthly sectoral credit information from select NBFCs has been initiated. These NBFCs represent around 88 per cent of total credit extended by all NBFCs in upper and middle layers. 15 H1:2025-26 data up to August 2025. 80 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guA Housing Credit card outstanding Vehicle loans Other personal loans** Note: **: Other personal loans include all personal loans except housing, credit card outstanding and vehicle loans. Source: RBI.Chapter IV Liquidity Conditions and Financial Markets Chart IV.32: Sectoral Contribution of NBFCs’ Credit Growth (Percentage points) 18 16 14 12.1 12 10 5.4 8 6 2.5 4 2 4.2 0.1 0 Source: RBI. 8811 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guA to the policy rate cuts and moderation in cost of funds (Chart IV.33a). The decline in deposit rates has been mainly led by bulk deposits in the wake of large surplus liquidity conditions and moderation in credit demand (Chart IV.33.b). Since the onset of the current easing cycle in February 2025, banks have adjusted their repo-linked lending rates downward by 100 bps. The marginal cost of funds- based lending rate, which has a longer reset period, has also declined. The 1-year median marginal cost of funds-based lending rate of scheduled commercial banks softened by 40 bps during February-August 2025. Consequently, the weighted average lending rates on Agriculture Industry Services fresh and outstanding rupee loans declined by 58 bps Retail loans Non-food credit (interest rate effect accounts for 71 bps)16 and 55 bps, respectively, during the same period. On the deposit IV.3 Transmission to Lending and Deposit Rates side, the weighted average domestic term deposit rates on fresh and outstanding deposits declined by Transmission of the cumulative policy rate cut of 106 bps and 22 bps, respectively (Table IV.10). 100 basis points to lending and deposit rates has been quick in the current easing cycle commencing The share of the external benchmark-based lending February 2025. Banks have adjusted their lending and rate linked loans in total outstanding floating rate deposit rates downwards in H1:2025-26 in response loans of scheduled commercial banks increased to Chart IV.33: Transmission to Banks’ Lending and Deposit Rates during Feb-Aug 2025 a. Lending Rates (WALR) b. Deposit Rates (WADTDR) (Basis points) (Basis points) 20 20 0 0 -20 -20 -22 -40 -40 -55 -60 -60 -58 -80 -80 -100 -100 -100 -100 -106 -120 -120 Feb-25 Mar-25 Apr-25 May-25 Jun-25 Jul-25 Aug-25 Feb-25 Mar-25 Apr-25 May-25 Jun-25 Jul-25 Aug-25 Repo rate Outstanding loans Fresh loans Repo rate Outstanding loans Fresh loans WALR: Weighted average lending rate; WADTDR: Weighted average domestic term deposit rate. Source: RBI. 16 The interest rate effect can be arrived at by keeping the weight constant, with the residual change in the weighted average landing rate attributed to the weight effect.Monetary Policy Report October 2025 Table IV.10: Transmission to Banks’ Deposit and Lending Rates (Basis points) Period Repo Rate Term Deposit Rates Lending Rates WADTDR WADTDR EBLR 1-Yr. MCLR WALR WALR Fresh Deposits Outstanding (Median) Fresh Rupee Loans Outstanding Deposits Rupee Loans Retail Retail Retail Overall Interest Deposits and Bulk and Bulk Effect Rate Deposits Deposits Effect# (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Tightening Period +250 190 259 206 250 175 182 191 115 May 2022 to Jan 2025 Easing Phase -100 -64 -106 -22 -100 -40 -58 -71 -55 Feb 2025 to Aug 2025 Memo Jun – 2025 -50 -26 -36 -7 -50 -5 -58 -30 -23 Jul – 2025 0 -11 -14 -8 0 -15 19 -4 -6 Aug – 2025 0 -7 -5 -5 0 -15 -6 -11 -6 Notes: Data on EBLR pertain to 32 domestic banks. # : At constant weight. WALR: Weighted average lending rate; WADTDR: Weighted average domestic term deposit rate; MCLR: Marginal cost of funds-based lending rate; EBLR: External benchmark-based lending rate. Sources: MPD06 return; and RBI. 62.9 per cent as at end-June 2025 from 61.6 per cent banks extend a large part of their loans at external as at end-March 2025. Consequently, the share of benchmark-based lending rates (Chart IV.34.b). The marginal cost of funds-based lending rates linked marginal cost of funds-based lending rates and other loans declined (Table IV.11). Increasing share of legacy rates – based on internal benchmarks and loans linked to external benchmark has quickened having longer reset periods – act as an impediment to faster policy transmission. the pace of transmission to lending rates. Bank group-wise, the transmission to weighted Public sector banks still have a significant proportion average lending rates on fresh and outstanding rupee of their loans linked to marginal cost of funds-based loans of private banks was higher than that of public lending rates (Chart IV.34a). On the other hand, private sector banks (Chart IV.35a). As alluded to earlier, the Table IV.11: Share of Outstanding Floating Rate large share of external-benchmark based loans led to Loans across Interest Rate Benchmarks better transmission in case of private banks compared Regime June 2024 March 2025 June 2025 to public sector banks. However, lending rates of MCLR 38.2 34.9 33.8 private banks remained above those of public sector EBLR 57.9 61.6 62.9 banks (Chart IV.35.b). The maximum pass-through Others 3.9 3.5 3.3 to lending rates was witnessed among foreign banks, Notes: 1. ‘Others’ include benchmark prime lending rate, base rate and other internal benchmarks. reflecting their higher share of external benchmark- 2. Data pertain to 74 scheduled commercial banks. 3. EBLR: External benchmark-based lending rate; MCLR: Marginal based lending rates and higher share of low-cost and cost of funds-based lending rate. wholesale deposits of lower maturity.17 Source: RBI. 17 The proportion of external benchmark-based lending rate linked loans was the highest for foreign banks (93.5 per cent), followed by private banks (87.9 per cent) and public sector banks (47.2 per cent) as at end-June 2025. 82Chapter IV Liquidity Conditions and Financial Markets Sectoral analysis shows that the transmission to banks/sectors towards higher interest rate slabs may lending rates on fresh and outstanding loans has been reduce the extent of transmission during and easing broad-based. The pace of transmission varied across cycle. Hence, changes in the weighted average lending sectors due to varying proportion of credit portfolios rate may be decomposed into interest rate effect and linked to fixed and floating interest rates and volume effect for assessing transmission to lending differential spreads charged by banks. Even though rates, especially on fresh loans during a policy cycle.18 lending rates moderated, the shifts in volumes across During the current easing cycle (Feb-Aug 2025), the Chart IV.35: Bank Group-wise Transmission to Lending Rates a. Transmission to Lending Rates b. Lending Rates of Domestic Banks (Basis points) (Per cent) 0 11 10 9.55 -20 9.44 9 8.88 -40 8 8.06 -47 -60 -53 -55 -58 7 -63 -80 -76 6 -84 -100 -107 -120 WALR (Fresh rupee loans)-PSBs PSBs PVBs FBs SCBs PSBs PVBs FBs SCBs WALR (Fresh rupee loans)-PVBs WALR WALR 1-Year median MCLR-PSBs (Fresh rupee loans) (Outstanding loans) 1-Year median MCLR-PVBs Notes: PSBs: Public sector banks; PVBs: Private banks; FBs: Foreign banks; SCBs: Scheduled commercial banks; WALR: Weighted average lending rate; MCLR: Marginal cost of funds-based lending rate. Source: RBI. 8833 22-yaM 22-guA 22-voN 32-beF 32-yaM 32-guA 32-voN 42-beF 42-yaM 42-guA 42-voN 52-beF 52-yaM 52-guA Chart IV.34: Outstanding Floating Rate Rupee Loans of SCBs across Interest Rate Benchmarks a. Public Sector Banks b. Private Banks (Per cent) (Per cent) 100 80 60 40 20 0 MCLR External benchmark Others Notes: 1. MCLR: Marginal cost of funds-based lending rate. 2. Data pertains to end-June 2025. 3. ‘Others’ include benchmark prime lending rate, base rate and other internal benchmarks. Source: Ad-hoc survey. erutlucirgA egraL yrtsudnI sEMSM erutcurtsarfnI edarT gnisuoH elciheV noitacudE rehtO snaoL lanosreP 100 80 60 40 20 0 erutlucirgA egraL yrtsudnI sEMSM erutcurtsarfnI edarT gnisuoH elciheV noitacudE rehtO snaoL lanosreP MCLR External benchmark Others 18 The interest rate effect can be arrived at by keeping the weight constant, with the residual change in the weighted average landing rate attributed to the weight effect.Monetary Policy Report October 2025 Chart IV.36: Sector-wise Transmission to Weighted Average Lending Rates (Feb - Aug 2025) a. Fresh Rupee Loans b. Outstanding Rupee Loans (Basis points) (Basis points) 20 0 -20 -40 -36 -60 -49 -80 -70 -58 -77 -100 -82 -87 -89 -83 Interest rate effect Volume effect Transmission Sources: MPD06 return; and RBI. volume effect partially dampened transmission domestic bank groups, public sector banks charged a in large industry and vehicle loans, whereas it lower spread than private banks for housing, vehicle, complemented interest rate effect in other sectors, education, and other personal loans. Public sector thereby enhancing transmission in these sectors banks, however, charged a higher spread for micro, (Chart IV.36). small and medium enterprises loans as compared to private banks. For external benchmark-based lending rate loans, banks have increased their spreads (charged over Non-banking financial companies have been and above the benchmark rate), which dampened playing an increasingly important role in meeting the extent of transmission (Table IV.12). The spread the credit needs of the economy. They extend the on fresh rupee loans was the highest for education last mile credit to hitherto unbanked areas and loans, followed by other personal loans, and micro, provide niche financing to various sectors ranging small and medium enterprises loans. Among from real estate and infrastructure to agriculture Table IV.12: Spread of Weighted Average Lending Rates on Fresh Rupee Loans* Sectors Jan-25 Aug-25 Public sector Private Domestic Public sector Private Domestic banks banks banks banks banks banks MSME Loans 3.43 3.12 3.20 3.48 3.33 3.36 Personal Loans Housing 2.09 2.44 2.34 2.11 2.51 2.37 Vehicle 2.63 4.03 3.07 2.69 4.26 3.01 Education 3.84 4.76 4.41 3.42 5.55 4.55 Other personal loans 3.01 5.38 3.36 3.30 5.31 3.58 Note: Other personal loans include loans other than housing, vehicle, education and credit card loans. * : Calculated over the repo rate for loans linked to external benchmarks. Sources: MPD06 return; and RBI staff estimates. 84 erutlucirgA yrtsudnI egraL sEMSM erutcurtsarfnI noitacudE elciheV gnisuoH rehtO snaoL lanosreP llarevO erutlucirgA yrtsudnI egraL sEMSM erutcurtsarfnI noitacudE elciheV gnisuoH rehtO snaoL lanosreP llarevO 20 0 -20 -25 -23 -40 -35 -41 -60 -59 -55 -80 -75 -83 -100 -92 Interest rate effect Volume effect TransmissionChapter IV Liquidity Conditions and Financial Markets and micro loans. Thus, non-banking financial companies enhance the reach of the credit channel of monetary transmission. The lending rates of non- banking financial companies generally tend to be higher than those of commercial banks. This reflects, inter alia, their liability structure and the risk profile of their borrowers. The degree of monetary policy transmission, therefore, differs between non-banking financial companies and scheduled commercial banks (Chart IV.37). Across bank groups, the pass-through to weighted average domestic term deposit rates on fresh and outstanding deposits was higher for public sector banks than private banks during February-August 2025 (Chart IV.38a). Interest rates on fresh retail deposits (Chart IV.38.b). The interest rates on savings bank moderated across tenors, although the extent varied deposits that comprise about 30 per cent of total Chart IV.38: Deposit Rates and Banks’ Profitability a. Transmission to Term Deposit rates* b. Transmission to Fresh Retail Term (Basis points) Deposits - Tenor wise* (Basis points) Outstanding Fresh Fresh (Retail and bulk) (Retail) (Retail and bulk) c. Savings Deposit Rates of SCBs# d. Net Interest Margin (NIM) and CASA Share of SCBs (Per cent) (Per cent) Repo rate Minimum savings deposit rate Maximum savings deposit rate Notes: PSBs: Public sector banks; PVBs: Private banks; FBs: Foreign banks; SCBs: Scheduled commercial banks; WADTDR: Weighted average domestic term deposit rate; CASA: Current account and savings account; NIM: Net interest margin. *: Transmission is calculated for the period February-August 2025. #: Savings deposit rates pertain to five major banks and relate to account balances of up to Rs 1 lakh. Sources: MPD06 return; and RBI. 8855 syad 41 - 7 syad 03 - 51 syad 54- 13 syad 09 - 64 syad 081- 19 syad 463 - 181 sraey 2 - 1 sraey 3 - 2 0 -20 -20 -17 -22 -200 -40 -40 -36 -42 -41 -37 -29 -60 -58 -60 -48 -80 -72 -69 -64 -1- 080 0 -91 -72 -86 -100 -99 -98 -105 -106 -120 PSBs PVBs FBs SCBs PSBs PVBs FBs SCBs PSBs PVBs FBs SCBs 7.0 45 3.8 6.0 3.7 5.5 40 5.0 3.6 4.0 35 3.5 3.0 3.4 2.5 2.0 30 3.3 3.2 25 3.1 20 3.0 Mar-24 Jun-24 Sep-24 Dec-24 Mar-25 CASA Share NIM (RHS) 91-naJ-81 91-nuJ-82 91-ceD-60 02-yaM-51 02-tcO-32 12-rpA-20 12-peS-01 22-beF-81 22-luJ-92 32-naJ-60 32-nuJ-61 32-voN-42 42-yaM-30 42-tcO-11 52-raM-12 52-guA-92 Chart IV.37: Monetary Policy Transmission to Outstanding Lending Rates of NBFCs (Basis points) 0 -11 -20 -40 -55 -60 -80 -100 -100 -120 Feb-25 Mar-25 Apr-25 May-25 Jun-25 Jul-25 Aug-25 Policy repo rate SCBs NBFCs Sources: Ad-hoc survey; and RBI. -120Monetary Policy Report October 2025 Table IV.13: Interest Rates on Small Savings Instruments – Q3:2025-26 Small Savings Scheme Maturity Spread$ Average G-sec Formula-based Government Difference (years) (Percentage yield# rate of Interest Announced Rate of (Percentage point) (Per cent) (Per cent) Interest (Per cent) point) (1) (2) (3) (4) (5) = (3) + (4) (6) (7) = (6) - (5) Savings Deposit - - 4.00 - Public Provident Fund 15 0.25 6.58 6.83 7.10 0.27 Term Deposits 1 Year 1 0 5.46 5.46 6.90 1.44 2 Year 2 0 5.62 5.62 7.00 1.38 3 Year 3 0 5.79 5.79 7.10 1.31 5 Year 5 0.25 6.12 6.37 7.50 1.13 Recurring Deposit Account 5 0 5.79 5.79 6.70 0.91 Monthly Income Scheme 5 0.25 6.09 6.34 7.40 1.06 Kisan Vikas Patra 115 Months 0 6.58 6.58 7.50 0.92 NSC VIII issue 5 0.25 6.26 6.51 7.70 1.19 Senior Citizens Saving Scheme 5 1.00 6.12 7.12 8.20 1.08 Sukanya Samriddhi Account Scheme 21 0.75 6.58 7.33 8.20 0.87 $: Spreads for fixing small saving rates as per the Government of India Press Release of February 2016. #: Based on semi-annualised yield on G-sec of corresponding maturity for the period Jun-Aug 2025. Note: Compounding frequency varies across instruments. Sources: Government of India; Financial Benchmarks India Pvt. Ltd; and RBI staff estimates. deposits have also declined in the current easing IV.4 Conclusion cycle (Chart IV.38.c). Banks are generally prompt in System liquidity remained in surplus during H1 on the reducing their savings deposit rates in an easing cycle. back of Reserve Bank’s liquidity augmenting measures Large surplus liquidity amidst moderation in credit and increase in government spending. Domestic demand enabled banks to transmit rate cuts faster financial markets remained resilient amidst increased to their liability side, which helped them to manage volatility in global financial markets induced by trade and geopolitical uncertainties. Money market rates their margins effectively (Chart IV.38.d). moved in tandem with the policy repo rate. Long The Government of India reviewed the interest term bond yields eased at the beginning of the year rates on various small savings instruments, which but hardened from June onwards amidst domestic are linked to secondary market yields on G-secs of developments and global cues. Indian equity markets comparable maturities and kept them unchanged for demonstrated resilience and generally maintained an Q3:2025-26. This led to a widening of gap between upward trajectory with intermittent corrections. The INR remained range-bound in Q1 but came under the interest rates on most small saving instruments depreciating pressures in Q2. The credit market and their formula-based rates (Table IV.13). The registered robust transmission with lending and widening gaps may be limiting the transmission of deposits rates declining faster in the current easing policy rates to banks’ deposit rates, especially in an cycle. Going forward, the Reserve Bank will remain easing cycle, because of the potential substitution agile and nimble in liquidity management operations effect. A large interest rate differential in favour of to ensure adequate liquidity in the system to meet small savings could lead to a migration of deposits the productive requirements of the economy while away from banks. safeguarding financial stability. 86Chapter V External Environment V. External Environment Global growth remains below its long-term average and is projected to decelerate in 2025 amid elevated uncertainties and higher tariffs. Inflation continues to moderate but remains above target for several economies with recent upticks observed in some advanced economies. Central banks remain cautious in normalising monetary policy as they assess the unfolding impact of tariffs. Financial markets stay volatile responding to shifting policy signals, even as equities rebounded strongly. Trade policy uncertainty, geoeconomic fragmentation, lingering geopolitical risks, stretched equity valuations, rising fiscal concerns and inflation persistence pose downside risks to the global growth outlook. The global economy, growing below its long-term policy support in some economies could support average, is projected to slow in 2025. The near-term global growth during the rest of H2. Trade deals growth outlook is clouded by trade policy uncertainty, struck during the year so far have lowered trade geoeconomic fragmentation, geopolitical risks, and policy uncertainty but it remains elevated. In its financial market volatility. The recent uptick in World Economic Outlook update of July 2025, the inflation, particularly in advanced economies (AEs), International Monetary Fund (IMF) revised up its coupled with unfolding impact of high tariffs has global growth projections to 3.0 per cent from 2.8 impeded the disinflation process, posing risks to per cent for 2025, and to 3.1 per cent from 3.0 per price stability. Consequently, central banks have cent for 2026. EMEs face several challenges ranging adopted a cautious approach in their policy decisions from weaker global growth, trade policy uncertainty carefully weighing incoming data. Global financial to climate-related disruptions which could adversely markets remained volatile, reflecting shifting risk affect their economic prospects. perceptions amid elevated trade policy uncertainty. Among AEs, the US economy has remained resilient Equity markets scaled new highs driven by tech despite some fragility in its labour market. Real stocks. Short-term bond yields generally softened in GDP grew by 3.8 per cent [quarter-on-quarter anticipation of rate cuts. Long-term yields have risen seasonally adjusted annualized rate (q-o-q, saar)] in AEs on fiscal concerns but declined in emerging in Q2:2025, rebounding from the contraction of market economies (EMEs), as investors seeking 0.6 per cent in the first quarter (Table V.1). The portfolio diversification show renewed interest in growth in Q2 was propelled by lower net imports EME assets. The US dollar has weakened, reflecting and strong consumer spending, partially offset by trade policy uncertainty, fiscal imbalances, fragile decline in investment. Labour market showed signs investor confidence, and shifting expectations about of weakness as additions to non-farm payrolls in the rate cut by the Federal Reserve. August were underwhelming. The unemployment V.1 Global Economic Conditions rate also edged up to 4.3 per cent, but remained low. In 2025 so far, global economic activity has remained In August, the US Composite Purchasing Managers resilient. High frequency indicators for Q3:2025 Index (PMI) remained robust supported by a buoyant point to a tepid manufacturing activity, but services services sector and recovery in manufacturing sector remain buoyant. Monetary easing and other activity. Consumer sentiment, as measured by the 8877Monetary Policy Report October 2025 University of Michigan survey, retreated in August Table V.1: Real GDP Growth (Per cent) on inflation fears even as readings remained above April-May 2025 levels. Going forward, economic Country Q3- Q4- Q1- Q2- 2024 2025 2026 2024 2024 2025 2025 (P) (P) activity will depend largely on how well the US Quarter-on-quarter, seasonally adjusted, annualised rate (q-o-q, saar) absorbs tariff related pass-throughs and the course Canada 2.4 2.1 2.0 -1.6 of monetary policy. Euro area 1.6 1.6 2.3 0.5 Japan’s GDP grew by 2.2 per cent (q-o-q, saar) in Japan 2.3 2.1 0.3 2.2 Q2:2025, driven by consumer spending amid tariff South Korea 0.4 0.3 -0.9 2.7 headwinds and political uncertainty. The Composite UK 0.0 0.4 3.0 1.4 PMI at 52.0 in August showed buoyant private sector US 3.3 1.9 -0.6 3.8 activity, albeit driven by services. High inflation, (Year-on-year) weaker exports and a volatile currency remain key Advanced Economies challenges for the economy. Canada 1.9 2.3 2.3 1.2 1.6 1.6 1.9 Real GDP growth in the Euro area decelerated in Q2 Euro area 0.9 1.3 1.6 1.5 0.9 1.0 1.2 to 0.5 per cent (q-o-q, saar) from 2.3 per cent in Q1, Japan 0.8 1.2 1.7 1.7 0.2 0.7 0.5 marking the weakest quarter since Q4:2023 as GDP South Korea 1.4 1.1 0.0 0.6 2.0 0.8 1.8 contracted in Germany and Italy. Labour markets, UK 1.2 1.5 1.3 1.2 1.1 1.2 1.4 however, stayed resilient with unemployment steady US 2.8 2.4 2.0 2.1 2.8 1.9 2.0 at around 6.2 per cent. The Composite PMI stayed Emerging Market Economies in expansion zone, driven by services. Looking Brazil 4.1 3.6 2.9 2.2 3.4 2.3 2.1 ahead, higher defence and infrastructure spending, China 4.6 5.4 5.4 5.2 5.0 4.8 4.2 accompanied by easing of inflationary pressures, India 5.6 6.4 7.4 7.8 6.5 6.4 6.4 should support growth. Indonesia 5.0 5.0 4.9 5.1 5.0 4.8 4.8 GDP growth in the UK moderated to 1.4 per cent Philippines 5.2 5.3 5.4 5.5 5.7 5.5 5.9 (q-o-q, saar) in Q2:2025 from 3.0 per cent in Q1, due Russia 3.3 4.5 1.4 1.1 4.3 0.9 1.0 to a weak production sector. The unemployment rate South Africa 0.4 0.8 0.8 0.6 0.5 1.0 1.3 at 4.7 per cent in Q2 remained at a four-year high. Thailand 3.0 3.3 3.2 2.8 2.5 2.0 1.7 The UK Composite PMI at 53.5 in August indicated Memo: resilient private sector activity as services sector World 2024 2025 (P) 2026 (P) remained a pillar of strength amidst conclusion of Year-on-year US-UK trade deal. Elevated levels of services inflation Output 3.3 3.0 3.1 and persistent softness in manufacturing, however, Trade volume 3.5 2.6 1.9 remain a cause of concern. P: Projection Notes: 1. India’s data correspond to fiscal year (April-March); e.g., 2025 Amongst major EMEs, some have shown signs of pertains to April 2025-March 2026. weakness including Brazil and Russia as elevated 2. Projections for 2025 and 2026 are taken from the IMF WEO, July 2025 update. tariffs are likely to have an adverse impact on Sources: Official statistical agencies; Bloomberg; International growth. The Chinese economy, however, remained Monetary Fund World Economic Outlook Update, July 2025 and RBI staff estimates. resilient, expanding by 5.2 per cent year-on-year (y-o-y) 88Chapter V External Environment in Q2, marking a slight slowdown from 5.4 per quarter. Business confidence in Russia weakened in cent in Q1. The property sector woes continue to August, as manufacturing activity remained tepid as weigh on growth momentum. Property investments indicated by the PMI. plunged, while retail sales and industrial output The ASEAN economies are navigating a challenging remained sluggish in Q3. China's exports remained landscape. The Asian Development Bank in July resilient as shipments to ASEAN1 increased in the revised down Southeast Asia's growth projections to wake of tariffs. Policymakers undertook both fiscal 4.2 per cent from 4.7 per cent for 2025; for 2026 it and monetary measures to bolster economic activity. was revised down to 4.3 per cent from 4.7 per cent. Deflation, a languishing property sector, subdued Growth in BRICS2 economies, except India, is likely consumer expenditure and trade policy uncertainty to remain subdued as these economies grapple with pose downside risks to China’s growth prospects multiple domestic headwinds as alluded to earlier during the rest of H2. (Table V.2). A challenging external environment Brazil’s GDP growth decelerated to 2.2 per cent might aggravate country-specific risks. (y-o-y) in Q2:2025 from 2.9 per cent in Q1 due to Turning to high frequency indicators, the moderation in domestic spending and investment. Organisation for Economic Co-operation and The labour market, however, remained tight as Development’s composite leading indicator showed the unemployment rate continued to fall, reaching that most economies remained above the long-term 5.6 per cent in the quarter ending July. Private trend during Q3:2025 (up to August) (Chart V.1a). sector activity remained weak in Q2 and Q3 (up to The Global Composite PMI remained in expansion August) as indicated by the Composite PMI. Political zone during April – August 2025, with services uncertainty ahead of the 2026 elections and weather- being the main driver of growth (Chart V.1b). Global related events pose further downside risks to Brazil’s Manufacturing PMI, however, remained in the growth amidst a challenging external environment. contraction zone in April and May before expanding Economic recovery in South Africa remained fragile marginally in June and again in August. as its GDP grew by 0.6 per cent (y-o-y) in Q2:2025, down from 0.8 per cent in the previous quarter, The US tariff announcements since April 2025 and due to slower gross fixed capital formation. Both the subsequent bilateral trade deals have introduced consumer confidence and business confidence in Q2 far-reaching shifts in global trade dynamics, posing reflected overall pessimism, along with labour market significant risks to the free flow of goods across the pressures that have remained acute during the year globe. Despite these jolts to international trade, so far, with the unemployment rate edging up in global merchandise trade volume grew for six Q2. The Composite PMI showed modest expansion consecutive quarters up to Q2:2025, and it continued in private sector activity in Q3 (up to August). In to grow in Q3:2025 (July 2025), with faster growth Russia, growth led by defence spending has been in 2025 so far. The growth, however, hides the cooling off, with its GDP growing by 1.1 per cent in weakness in trade as it was primarily driven by Q2:2025, slowing from 1.4 per cent in the previous front-loading before the US tariff hikes came into 1 Association of Southeast Asian Nations (ASEAN) includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. 2 The BRICS includes group of 10 countries - Brazil, China, Egypt, Ethiopia, India, Indonesia, Iran, Russian Federation, South Africa, and United Arab Emirates. 8899Monetary Policy Report October 2025 Table V.2: Select Macroeconomic Indicators for BRICS Real GDP growth rate Country 2024 2025(P) 2026(P) General Government Country 2024 2025(P) 2026(P) (y-o-y, per cent) gross debt Brazil 3.4 2.3 2.1 Brazil 87.3 92.0 96.0 (per cent of GDP) Russia 4.3 0.9 1.0 Russia 20.3 21.4 22.5 India 6.5 6.4 6.4 India 81.3 80.4 79.6 China 5.0 4.8 4.2 China 88.3 96.3 102.3 South Africa 0.5 1.0 1.3 South Africa 76.4 79.6 81.7 CPI inflation rate Country 2024 2025(P) 2026(P) Current account Country 2024 2025(P) 2026(P) (y-o-y, per cent) balance (per cent of Brazil 4.4 5.3 4.3 Brazil -2.8 -2.3 -2.2 GDP) Russia 8.4 9.3 5.5 Russia 2.9 1.9 1.8 India 4.6 4.2 4.1 India -0.6 -0.9 -1.4 China 0.2 0.0 0.6 China 2.3 1.9 1.7 South Africa 4.4 3.8 4.5 South Africa -0.6 -1.2 -1.4 General Government Country 2024 2025(P) 2026(P) Forex reserves* Country 2023 2024 2025 net lending/borrowing (in US$ billion) Brazil -6.6 -8.5 -7.7 Brazil 355.0 329.7 350.8 (per cent of GDP) Russia -2.2 -1.0 -1.2 Russia 598.6 609.1 689.5 India -7.4 -6.9 -7.2 India 622.5 635.7 702.6 China -7.3 -8.6 -8.5 China 3449.7 3455.6 3602.1 South Africa -6.1 -6.6 -6.1 South Africa 62.5 65.5 69.2 P: Projection *: Forex reserves for 2025 pertain to July for all countries except for Brazil and Russia (August 2025) and India (September 19). Notes: 1. India’s data correspond to fiscal year (April-March) except data on forex reserves which are as per calendar year. 2. Projections for 2025 and 2026 are taken from the IMF WEO, July 2025 update. Sources: Official statistical agencies; World Economic Outlook April 2025 database and July 2025 Update, IMF; International Reserve and Foreign Currency Liquidity (IRFCL), IMF; and RBI. effect (Chart V.2a). The emerging market economies the global ocean freight container pricing index that were the major drivers of growth in Q2 and Q3 measures 40-feet container prices – trended below (up to July 2025). The Freightos Baltic Global Index – the 2024 average during most of 2025 (Chart V.2b). Chart V.1: Survey Indicators a. OECD Composite Leading Indicators b. Composite PMI (Index) (Index) 102 101.6 101.2 101 100.8 100.4 100 99.7 99 US UK Germany US UK Global China India China (Caixin) Euro area Sources: Organisation for Economic Co-operation and Development (OECD); and Bloomberg. 90 42-naJ 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guA 56 54.6 54 53.5 52.9 52 51.9 51.0 50 48 46 42-naJ 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guAChapter V External Environment Chart V.2: World Trade Volume a. World Trade Volume: Relative Contribution b. World Trade Volume and Freightos Baltic Global Index (Percentage point) (Per cent, left scale; Index, right scale) 6.0 5.4 6500 5.0 7.0 4.0 2.9 5.4 5500 3.0 4.0 4500 2.0 1.0 2.4 1.3 3500 1.0 0.0 2500 -1.0 -2.0 -2.0 2072.1 1500 -3.0 -4.0 -5.0 500 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Jul 2022 2023 2024 2025 AEs EMEs World trade growth (y-o-y) World trade (m-o-m) World trade growth (per cent, y-o-y) Freightos Baltic Global Index (RHS) Sources: CPB Netherlands; Refinitiv Eikon; and RBI staff estimates. The World Trade Organisation’s latest Goods Trade commodity prices, particularly in energy and metals. Barometer for June 2025 indicates that strong trade Prices softened in July as energy and industrial metal volume growth witnessed before the implementation prices declined due to oversupply and weak demand. of higher US tariffs might slow down during the Commodity prices rose in August and September rest of 2025. In August 2025, the World Trade driven by precious metals on safe haven demand Organisation projected world merchandise trade to amid elevated uncertainty (Chart V.3a). According to grow by 0.9 per cent in 2025, an improvement from the Food and Agriculture Organization, global food the 0.2 per cent contraction estimated in April 2025, prices firmed up modestly in Q2, primarily due to mainly reflecting front-loading of imports in the US. rise in dairy and meat prices, partially offset by the It, however, revised down the growth projection for fall in sugar and cereal prices. Food prices edged up 2026 to 1.8 per cent from the previous estimate of in Q3 (up to August) as gains in meat and vegetable 2.5 per cent. oil prices outweighed declines in cereals and sugar V.2 Commodity Prices and Inflation (Chart V.3b). Global commodity prices exhibited volatility in Q2, Crude oil prices have generally remained subdued on account of geopolitical tensions and uncertainty since April 2025 on the OPEC+ decision to raise surrounding US tariffs. As measured by the Bloomberg production. The OPEC+ reversed its previous strategy Commodity Price Index, commodity prices fell in of production cuts, opting instead to phase out 2.2 April mainly due to a decline in energy and base million barrels per day of voluntary output reductions. metal prices reflecting a bleak demand outlook. Oil prices firmed up in June and July as geopolitical The fall continued in May led by lower agricultural risks rose, driving up prices before the de-escalation prices. In June, announcements of new US tariffs of conflict between Iran and Israel led to a softening of increased global uncertainty, engendering spike in prices in Q2. Oil prices remained range-bound in Q3 9911 32-rpA 32-nuJ 32-guA 32-tcO 32-ceD 42-beF 42-rpA 42-nuJ 42-guA 42-tcO 42-ceD 52-beF 52-rpA 52-nuJ 52-guAMonetary Policy Report October 2025 Chart V.3: Commodity Prices a. Bloomberg Commodity Price Index b. Food Price Indices [Index (end-2023 = 100)] [Index (2014-16=100)] 170 160 150 152.6 140 130.1 130 128.0 120 110 105.6 100 Sources: Food and Agriculture Organisation; World Bank; Bloomberg; and Petroleum Planning and Analysis Cell, Ministry of Petroleum & Natural Gas, Government of India. amid ample supply and weak global growth outlook Consumer Price Inflation (Chart V.3c). Global consumer price inflation continued to Metal prices exhibited a mixed trend in Q2, influenced moderate gradually, though at an uneven pace. While by fluctuating demand-supply dynamics in China disinflation slowed in AEs, it continued in EMEs and global economic conditions, including US trade with China facing deflation. Persistent tightness in policies. Base metal prices remained subdued in Q3 labour markets kept underlying inflation elevated due to weak demand from China. As per the World in many economies, though softening commodity Gold Council data, the demand for gold surged to prices contained the rise. Headline inflation remains 1249 tonnes in Q2, a 3.0 per cent (y-o-y) rise, fuelled above central bank targets in several countries as by strong investment demand – mainly into exchange well as above their pre-pandemic levels. As per IMF’s traded funds (ETFs) – due to safe-haven demand World Economic Outlook (July 2025 update), global amidst global uncertainties. Globally, central banks headline inflation is projected at 4.2 per cent for 2025 added 166 tonnes of gold to official reserves further and 3.6 per cent for 2026 (Table V.3). Accordingly, boosting its demand. Gold prices remained elevated central banks in AEs remain focused on ensuring in Q3, surging to all time high in September (Chart that inflation returns to target, while considering V.3d). risks to output and employment. Many EMEs are 92 42-naJ 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guA Food Meat Cereals Dairy c. Energy and Crude Oil Prices d. Metal Price Indices (US$ per bbl, left scale; Index, right scale) (Index (end-2023=100), left scale; (Index (end-2023=100), right scale) 90 130 85 120 110 80 96.3 100 75 88.1 90 70 69 8. 01 68.2 65 70 60 60 42-naJ 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guA 185 125 18 11 7.8 0 119.8 115 155 113.0 1101.490 105 125 95 110 85 95 Brent Crude Oil Indian basket Energy Price Index (RHS) Natural Gas index (RHS) Copper Aluminium Zinc Gold (RHS) 42-naJ-5 42-beF-9 42-raM-51 42-rpA-91 42-yaM-42 42-nuJ-82 42-guA-2 42-peS-6 42-tcO-11 42-voN-51 42-ceD-02 52-naJ-42 52-beF-82 52-rpA-4 52-yaM-9 52-nuJ-31 52-luJ-81 52-guA-22 52-peS-62 110 108 106 105.1 104 102 100 98 96 94 92 90 42-naJ-50 42-beF-90 42-raM-51 42-rpA-91 42-yaM-42 42-nuJ-82 42-guA-20 42-peS-60 42-tcO-11 42-voN-51 42-ceD-02 52-naJ-42 52-beF-82 52-rpA-40 52-yaM-90 52-nuJ-31 52-luJ-81 52-guA-22 52-peS-62Chapter V External Environment pursuing monetary easing to support growth amidst Inflation in EMEs has been broadly moderating since easing inflation pressures. the April MPR. The risk of deflation is evident across several Asian economies, driven by a combination of In the US, the disinflation process slowed as both subdued demand, sluggish wage growth and excess headline and core inflation witnessed an uptick in supply. Q2 and Q3 with elevated shelter costs. The headline In Brazil, inflation moderated from 5.5 per cent in CPI and core inflation (y-o-y) rose to 2.9 per cent March to 5.1 per cent in August, driven by lower and 3.1 per cent, respectively, in August up from 2.4 inflation in transport, and falling food prices, amidst per cent and 2.8 per cent in March 2025, marking high interest rates (Chart V.4c). Core inflation in the highest levels since February. The recent uptick Brazil, however, picked up from 4.9 per cent in March partly reflects the impact of tariffs and their pass- to 5.4 per cent during June-August (Chart V.4d). South through to core components. Inflation, measured by the personal consumption expenditure (PCE) price Table V.3: Consumer Price Inflation index — the Federal Reserve’s preferred inflation (Y-o-y, Per cent) metric — also witnessed a similar uptick, rising from Country Inflation Q3: Q4: Q1: Q2: Jul - Aug - 2.4 per cent in March to 2.7 per cent in August (Chart Target 2024 2024 2025 2025 25 25 V.4a). Core PCE inflation registered an increase from Advanced Economies Canada 2.0 ± 1.0 2.0 1.9 2.3 1.8 1.7 1.9 2.7 per cent in March to 2.9 per cent in August (Chart Euro area 2.0 2.2 2.2 2.3 2.0 2.0 2.0 V.4b). Japan 2.0 2.8 2.9 3.8 3.5 3.1 2.7 In the UK, headline inflation rose to 3.8 per cent in South Korea 2.0 2.1 1.6 2.1 2.1 2.1 1.7 August from 2.6 per cent in March 2025, reaching United Kingdom 2.0 2.0 2.5 2.8 3.5 3.8 3.8 the highest level since January 2024 due to elevated CPI - 2.6 2.7 2.7 2.5 2.7 2.9 United services inflation. Core inflation also remained States PCE 2.0 2.4 2.6 2.6 2.5 2.6 2.7 elevated. Emerging Market Economies In the Euro area, headline inflation marginally Brazil 3.0 ± 1.5 4.4 4.8 5.0 5.4 5.2 5.1 declined from 2.2 per cent in March to 2.0 per cent Russia 4.0 8.9 9.0 10.1 9.8 8.8 8.1 India 4.0 ± 2.0 4.2 5.6 3.7 2.7 1.6 2.1 in August, aligning with the European Central Bank’s China 2.0 0.5 0.2 -0.1 0.0 0.0 -0.4 target of 2.0 per cent. Inflation in the Euro area was South Africa 3.0 - 6.0 4.3 2.9 3.0 2.9 3.5 3.3 driven by food and services, partially offset by weak Mexico 3.0 ± 1.0 5.0 4.5 3.7 4.2 3.5 3.6 energy prices. Core inflation (excluding energy, Indonesia 2.5 ± 1.0 2.0 1.6 0.6 1.8 2.4 2.3 food, alcohol, and tobacco) remained steady at 2.3 Philippines 3.0 ± 1.0 3.2 2.6 2.3 1.4 0.9 1.5 per cent since May, after moderating from 2.7 per Thailand 1.0 - 3.0 0.6 1.0 1.1 -0.3 -0.7 -0.8 cent in April. In Japan, CPI inflation excluding fresh Turkey 5.0 ± 2.0 54.4 46.7 39.8 36.1 33.5 33.0 food — the Bank of Japan's prefered inflation metric Memo: — declined from 3.2 per cent in March to 2.7 per 2023 2024 2025 2026 cent in August. Headline CPI inflation decelerated (P) (P) to 2.7 per cent in August from 3.6 per cent in World consumer price inflation 6.6 5.6 4.2 3.6 March, primarily due to subdued electricity prices P: Projection Note: Inflation target for China is around 2.0 per cent for 2025 (Chart V.4b). Sources: Central bank websites; IMF; and Bloomberg. 9933Monetary Policy Report October 2025 Africa saw a rise in headline inflation from 2.7 per contrast, disinflation is continuing in EMEs (Chart cent to 3.3 per cent over the same period, whereas V.5a & b). core inflation remained steady at around 3.0 per cent V.3 Monetary Policy Stance during March-August. In Russia, headline inflation moderated from 10.3 per cent in March to 8.1 per cent During Q2 and Q3, central banks adopted in August. Inflation, however, remains elevated and divergent monetary policy paths, driven by their well above the target of 4.0 per cent. domestic growth-inflation dynamics and other macroeconomic developments amidst rising global China remained in deflation during February-May tariffs. Continued disinflation in some major EMEs before registering a meagre price rise of 0.1 per cent and a soft US dollar has provided EMEs with space in June and no change in the consumer price index in for monetary easing. July. However, prices fell again by 0.4 per cent largely due to lower food prices. The core inflation broadly The Federal Reserve maintained a pause on its target remained steady across EMEs. range for the federal funds rate in all the meetings Since the April 2025 MPR, the final phase of during January – July. In September, the Federal Open disinflation has been prolonged with a noticeable Market Committee lowered the range by 25 basis slowdown in disinflation process in major AEs. In points (bps) to 4.00-4.25 per cent in view of rise in Chart V.4: CPI Inflation (y-o-y) – Select Economies a. Advanced Economies - Headline b. Advanced Economies - Core (Per cent) (Per cent) US (PCE) Euro area Target UK Japan US (PCE) UK Euro area Japan c. Emerging Market Economies - Headline d. Emerging Market Economies - Core (Per cent) (Per cent) 9.0 8.1 7.0 5.0 5.1 3.0 3.3 2.1 1.0 -1.0 -0.4 Brazil Russia China Brazil Russia China South Africa India South Africa India 94 42-naJ 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guA 5.0 4.5 4.0 3.8 3.5 3.0 2.7 2.5 2.7 2.0 2.0 1.5 1.0 9.0 8.0 7.0 5.0 5.4 3.0 4.2 3.1 1.0 0.9 -1.0 42-naJ 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guA 42-naJ 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guA 5.0 4.5 4.0 3.5 3.6 3.3 3.0 2.9 2.5 2.3 2.0 1.5 1.0 42-naJ 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guA Notes: 1. For India, core CPI, i.e., CPI excluding food and fuel is worked out by eliminating the groups 'food and beverages' and 'fuel and light' from the headline CPI. 2. Chart V.4b refers to CPI inflation in all items less fresh food and energy. Sources: Official statistical agencies; Bloomberg; and RBI staff estimates.Chapter V External Environment downside risks to employment. The Committee also inflationary pressures. The European Central Bank stated that in considering additional adjustments to continued with the easing cycle, lowering its key rates the target range for the federal funds rate, it would by 25 bps each in April and June 2025 meetings. In Q3, carefully assess incoming data, the evolving outlook, the bank kept the rates unchanged. The Bank of Japan and the balance of risks. As per the summary of maintained status quo over the last five meetings, economic projections released in the September 2025, after hiking by 25 bps in January 2025 (Chart V.6a). the Committee expected the target range for the Among other AEs, Australia reduced its policy rate in federal funds rate to be at 3.50-3.75 per cent by the end May and August as inflation eased. Canada reduced of 2025, indicating two more rate cuts of 25 bps each. its policy rate by 25 bps in September considering a In September 2025, the Federal Reserve revised its weaker economy and less upside risk to inflation. New monetary policy framework. The revised framework Zealand lowered its policy rate by 75 bps during April- removed effective lower bound as a defining feature August 2025 on benign inflation outlook. Norway of the framework, returned to flexible inflation undertook a cautious easing of monetary policy, targeting by abandoning average inflation targeting cuting rate by 50 bps during 2025 as inflation evolved and de-emphasised the 'shortfall' from the maximum as projected and unemployment increased somewhat. employment. South Korea and Switzerland each have delivered rate The Bank of England reduced its policy rate by 25 bps cut of 25 bps since April whereas Sweden reduced the each in May and August 2025 to support economic benchmark rate by 50 bps during the same period. activity amidst flagging growth in the second quarter Israel has kept the policy rate unchanged since and uncertainty surrounding the global trade order February 2024. Elevated uncertainty surrounding despite the successful conclusion of a trade deal with global trade negotiations has made central banks the US. The Bank of England, however, maintained cautious, complicating decisions on rate cut. Futures status quo in September in view of renewed and Overnight Index Swap (OIS) markets, however, Chart V.5: Last Mile of Disinflation a. Advanced Economies b. Emerging Market Economies (Per cent) (Per cent) 0.7 Japan 1.2 -1.9 India -0.7 0.0 Euro 0.2 -1.2 South Africa -1.8 UK 1.8 0.6 Russia 4.1 6.3 US 0.4 0.7 Brazil 2.1 2.5 0.0 0.5 1.0 1.5 -3 0 3 6 August 2025 Inflation Deviation from Target August 2025 Inflation Deviation from Target March 2025 Inflation Deviation from Target March 2025 Inflation Deviation from Target Note: For Brazil, India, and South Africa the target is taken as the midpoint of their inflation control target range. Sources: Bloomberg; and RBI staff estimates. 9955Monetary Policy Report October 2025 Chart V.6: Policy Rate Changes – Select Major Economies a. Advanced Economies b. Emerging Market Economies (Basis points) (Basis points) 50 50 -50 -50 -75 -100 -150 -125 -125 -175 -200 -250 -225 -250 -250 -350 -325 Source: Bloomberg 3 The Chinese authorities intensified policy support through targeted fiscal measures to bolster consumers spending. 96 SU KU aera oruE napaJ adanaC nedewS yawroN cilbupeR hcezC ailartsuA dnalaeZ weN dnalecI aeroK htuoS 325 450 100 300 150 0 -150 -45 -100 -125 -150 -125 -300 -250 -450 -375 -350 -425 -375 lizarB aissuR aidnI anihC acirfA htuoS ocixeM elihC yragnuH senippilihP aibmoloC aisenodnI ureP H1:2024 H2:2024 Q1:2025 H1:2024 H2:2024 Q1:2025 Q2:2025 Q3:2025 (upto Sep 26, 2025) Q2:2025 Q3:2025 (upto Sep 26, 2025) Chart V.7: Market Implied Path of Policy Rates (Per cent) 4.5 4.0 3.64 3.5 3.27 3.24 3.0 2.5 2.0 1.85 1.5 US UK Euro area Australia Notes: 1. The chart is as on Sep 26, 2025. 2. Market implied policy rates are overnight indexed swap rates for US, UK, Australia, and Euro area. Source: Bloomberg 52-luJ 52-guA 52-peS 52-tcO 52-voN 52-ceD 62-naJ 62-beF 62-raM 62-rpA 62-yaM 62-nuJ 62-luJ are pricing in lower policy rates in major AEs going with subdued inflation. It, however, kept the policy forward (Chart V.7). rate unchanged at 2.75 per cent in its September meeting. Indonesia eased rates by 100 bps during Monetary policy in EMEs remained broadly supportive May-September to support growth and stabilize its of growth as inflation pressures eased, with Brazil currency amid declining inflation. The Philippines being a notable exception. Among the BRICS, Brazil raised its policy rate by a total of 275 bps to 15.0 per cent during January – June 2025 before pausing in July and September, as inflationary pressures remained persistent. On the contrary, Russia has reduced interest rate cumulatively by 400 bps during 2025 so far. China reduced its loan prime rates by 10 bps in May but left them unchanged thereafter as the economy remained resilient, adopting a wait-and-watch approach. In this regard, China has preferred structural support over repeated rate cuts.3 South Africa reduced rates by 25 bps each in May and July amid concerns over weak growth and moderation of inflation expectations. In Asia, Malaysia cut its policy rate by 25 bps in July – the first reduction in five years – citing trade uncertainty, as the economy remained resilientChapter V External Environment lowered rates in April, June and August as inflation The US dollar depreciated sharply since April, on fell to a multi-year low. Thailand cut the interest fiscal sustainability worries, trade policy uncertainty, rate in April and August by 25 bps each to combat and concerns over autonomy of institutions, while deflation. In Latin America, monetary policy was most EME currencies strengthened. broadly accommodative with Mexico leading rate Global equity markets fell sharply in April after the cuts among its peers. Many Latin American central announcement of reciprocal tariffs by the US. Markets banks have been frontrunning the Fed, as a softer rebounded subsequently as the implementation US dollar provided additional policy space to support of tariffs was postponed and bilateral trade deals growth. Mexico extended its easing cycle with a 150 were signed. As measured by the MSCI World Index, bps rate cut between May and September. Colombia equity markets gained by 18.1 per cent during April maintained a pause after a 25 bps rate cut in April. - September 2025, reflecting gains in both AEs and Chile cut its rate by 25 bps in July amid global trade EMEs (Chart V.8a). Among AEs, S&P 500 in the US policy uncertainty, marking the first cut in 2025. Peru exhibited heightened volatility in April due to higher cut the policy rate by 25 bps in May and September policy uncertainty (Chart V.9b). The subsequent easing each. Among the key European EMEs, Hungary kept of trade tensions, however, spurred a sharp rebound rates unchanged through 2025, whereas Poland eased in equity markets. The upward trajectory continued intermittently, by cutting its policy rate by a total of in rest of Q2, supported by the US-China trade deal 100 bps in 2025 so far (Chart V.6b). amid intermittent bout of volatility stemming from V.4 Global Financial Markets the Israel-Iran conflict. Later, increased bets on rate cuts by the Fed (Chart V.9a) and strong performance Notwithstanding divergent trends in the real by technology companies further drove the index to economy, financial markets remain buoyant across record levels in August and September. Valuations in countries with bouts of volatility amidst uncertainty equity markets, however, remain stretched. Overall, around trade policy, the Federal Reserve’s rate the S&P 500 Index rose by 18.4 per cent from April decisions and geopolitical tensions. After a sharp fall to September. in April, global financial markets rebounded strongly through Q2 and Q3, driven by a reassessment of tariff European stocks began Q2 on a tumultuous note risks to be less severe than initially anticipated. Equity as announcements of steep tariffs led to selling markets surged to record highs in many economies, pressures. They ended the quarter on a subdued supported by optimism surrounding de-escalation of note as lingering trade uncertainty and a strong euro the tariff war and an easing of geopolitical tensions. triggered risk-off sentiment. In Q3, european stock Enthusiasm over artificial intelligence drove strong markets performed better than in Q2, boosted by the gains in technology stocks. Government bond yields trade deal towards end-July and a steady inflation in many AEs rose, reflecting rising concerns about print. European equities, however, remained the debt sustainability. Tariff-induced inflation underwhelming compared to its peers due to weak pressures also kept monetary policy restrictive, second-quarter corporate earnings and downgrading exerting additional upward pressure on yields. In of France’s sovereign credit score by Fitch amid contrast, yields softened in many EMEs, as investors political uncertainty (Chart V.8b). The UK’s stock rebalanced portfolios away from traditional safe- indices performed better than European markets, haven assets towards higher-yielding EME securities. supported by its improving economy and the Bank 9977Monetary Policy Report October 2025 Chart V.9: Sources of Uncertainty: Monetary and Economic Policy a. Probability of Rate cut for the Federal b. US Uncertainty Indicators Reserve December Meeting (Index, left scale;Index, right scale) (Per cent) 8,000 550 7,000 6,000 450 5,000 350 4,000 306.9 3,000 250 2684.9 2,000 150 1,000 0 50 Trade Policy Uncertainty Index Baseline 1 Cut 2 Cuts Economic Policy Uncertainty Index (RHS) Note: In chart 9a, baseline refers to no change in policy rate of the US while the pace of rate cut is assumed to be 25 bps. Sources: Bloomberg; and CME FedWatch. 98 42-naJ 42-beF 42-raM 42-rpA 42-yaM 42-nuJ 42-luJ 42-guA 42-peS 42-tcO 42-voN 42-ceD 52-naJ 52-beF 52-raM 52-rpA 52-yaM 52-nuJ 52-luJ 52-guA 80.0 70.0 60.0 65.4 50.0 40.0 31.5 30.0 20.0 10.0 3.1 0.0 42-voN-01 42-ceD-21 52-naJ-31 52-beF-41 52-raM-81 52-rpA-91 52-yaM-12 52-nuJ-22 52-luJ-42 52-guA-52 52-peS-62 Chart V.8: Equity Markets a. Equity Indices (MSCI) b. Change in Equity Indices [Index (end-2023=100)] (Per cent) Euro area (Euro Stoxx 50) Japan (Nikkei) UK (FTSE) US (S&P 500) Brazil (Ibovespa) India (Sensex) China (SSE Index) South Africa (JSE Index) World AEs EMEs Q2:2025 Q3:2025 (upto Sep 26, 2025) Sources: Bloomberg; and RBI staff estimates. of England’s rate cuts. It helped the Financial Times its peers in Q2 as trade deal uncertainty made investors Stock Exchange reach record levels. It scaled new cautious. Following the interim agreement, however, heights in Q3 as global investors diversified their Chinese stocks outperformed in Q3, supported by portfolios. Japanese markets outperformed other AEs various government stimulus measures and growth in both quarters, buoyed by the US–Japan trade deal, in tech stocks. Brazil’s equity market gained during a weakening yen, and strong corporate earnings. April-September with occasional pullbacks driven by shifting global sentiment, political uncertainty Among EMEs, China’s equity market underperformed ahead of the 2026 elections, and soft commodity decnavdA tekram gnigremE seimonoce seimonoce 134.9 135 134.4 130 129.5 125 120 115 110 105 100 95 90 42-naJ-5 42-beF-9 42-raM-51 42-rpA-91 42-yaM-42 42-nuJ-82 42-guA-2 42-peS-6 42-tcO-11 42-voN-51 42-ceD-02 52-naJ-42 52-beF-82 52-rpA-4 52-yaM-9 52-nuJ-31 52-luJ-81 52-guA-22 52-peS-62 1.0 3.7 13.7 12.0 2.1 6.0 10.6 7.1 6.6 4.7 -3.8 8.0 3.3 11.1 8.8 10.7 -4 0 4 8 12Chapter V External Environment prices. Equity market in India rallied in Q2; however, hardened toward the end of September following the imposition of a 50 per cent US tariff dampened a significant upward revision to GDP numbers and investor sentiment, leading to a 3.8 per cent decline tracking changes in rate cut expectations. UK yields in India’s equity index (BSE Sensex) in Q3 despite hardened in Q3 on fiscal concerns ahead of the rating upgrade by S&P Global in August. autumn budget, diminishing rate-cut expectations, and renewed inflationary pressures. The German Sovereign bond yields across major AEs largely 10-year bund yields also firmed up as spending on declined in Q2, reflecting continued monetary defence and infrastructure was expected to rise, while policy easing. In the UK, 10-year yields fell as the the US–EU trade deal reduced demand for bunds government moved toward shorter-term borrowing as a safe-haven asset. The Japanese government amidst slowing growth. Japanese bond yields also bond yields rose in Q3 amidst political uncertainty declined, as government bond issuance was expected and elevated inflation. The Bank of Japan’s gradual to be trimmed and the Bank of Japan signalled reduction in bond purchases also exerted hardening a more cautious approach to interest rate hikes pressure on yields. considering tariff risks. In contrast, US Treasury yields firmed up due to the introduction of the ‘One In contrast, 10-year sovereign bond yields in many Big Beautiful Bill’ which raised concerns about fiscal EMEs largely eased since the last MPR, as investors sustainability and fears of increased bond supply diversified away from traditional safe-haven assets (Chart V.10a). In the US, yields, particularly the due to policy uncertainty triggered by the US tariffs. At 30-year, spiked after the passing of the bill by the the same time, several EME central banks supported Congress and an upward revision of inflation growth by reducing policy rates. In China, however, projections by the FOMC in June. Yields, however, government stimulus measures and ongoing trade eased through most of Q3 on rising expectations of negotiations fueled risk-on sentiment. As a result, rate cuts, driven by weak employment data. They investors shifted to equity from bonds, leading to rise Chart V.10: 10-Year Sovereign Bond Yields a. Select AEs b. Select EMEs (Per cent) (Per cent) 5 4.7 4.2 4 3 2.7 2 1.7 1 0 US UK Japan Germany Brazil India China South Africa Source: Bloomberg. 9999 42-naJ-50 42-beF-90 42-raM-51 42-rpA-91 42-yaM-42 42-nuJ-82 42-guA-20 42-peS-60 42-tcO-11 42-voN-51 42-ceD-02 52-naJ-42 52-beF-82 52-rpA-40 52-yaM-90 52-nuJ-31 52-luJ-81 52-guA-22 52-peS-62 15 13.7 13 11 9 9.2 7 6.5 5 3 1.9 1 42-naJ-50 42-beF-90 42-raM-51 42-rpA-91 42-yaM-42 42-nuJ-82 42-guA-20 42-peS-60 42-tcO-11 42-voN-51 42-ceD-02 52-naJ-42 52-beF-82 52-rpA-40 52-yaM-90 52-nuJ-31 52-luJ-81 52-guA-22 52-peS-62Monetary Policy Report October 2025 in yields (Chart V.10b). Globally, US treasury yields effects on EME yields, particularly in medium and exert sizeable and statistically significant spillover long-term maturities (Box V.1). Box V.1: Pass-through of US Treasury Yields to Emerging Market Bond Yields Chart V.1.1: Emerging Markets Yields Movements Index a. 3 Month Yields b. 2 Year Yields c. 10 Year Yields 300 5000 250 800 160 140 4500 700 140 120 250 4000 200 600 120 3500 100 200 3000 150 500 100 80 150 2500 400 80 2000 100 300 60 60 100 1500 200 40 40 1000 50 50 500 100 20 20 0 0 0 0 0 0 Mexico Brazil Mexico Brazil Mexico Brazil India South Africa India South Africa India South Africa US (RHS) US (RHS) US (RHS) Note: Yields have been indexed to Q1 of 2011 Sources: Reuters; and Bloomberg. (Contd.) 4 The EMEs country list here includes Brazil, Colombia, India, Mexico, the Philippines, Poland, Russia, South Africa, and Thailand. For the 30-year tenor, the sample spans Q4:2015 to Q2:2025 for eight countries (excluding Poland), while a 15-year tenor is used for Colombia due to data limitations. 100 1102:2Q 3102:2Q 5102:2Q 7102:2Q 9102:2Q 1202:2Q 3202:2Q 5202:2Q 1102:2Q 3102:2Q 5102:2Q 7102:2Q 9102:2Q 1202:2Q 3202:2Q 5202:2Q 1102:2Q 3102:2Q 5102:2Q 7102:2Q 9102:2Q 1202:2Q 3202:2Q 5202:2Q The pass-through of US financial conditions to emerging quarterly data spanning Q1:2011 to Q2:20254, with the market economies (EMEs) is a major conduit of global following specification financial spillovers, with movements in US Treasury Y α β r β CPI β FB β US β Ex δ ε yields playing a pivotal role. In fact, US monetary it it it it t it i it policy significantly shapes international bond markets Y: =E M +E b1ond + yi2elds, r+: c3entra +l ba4nk p +o li5cy ra t+e , C +P I: t t t (Albagli et al., 2018), and decline in long-term US yields consumer price inflation (year-on-year), FB: fiscal t boost foreign ownership of EME debt (Moore et al., balance to GDP ratio, US: US bond yields, Ex: change t t 2013). Moreover, US treasury yields are also found in exchange rate (year-on-year) δ: country fixed effect, to have large effects on AEs’ government bond yields i i indexes country, t indexes time, ε : idiosyncratic error (Avalos et al., 2025). Yield movements in EMEs are it term. suggestive of spillover impact from US Treasury yields (Chart V.1.1). The impact of domestic macroeconomic indicators is on expected lines. US treasury yields have the To assess the pass-through of US yields to the short- term (3-month), medium-term (2-year), and long-term strongest spillover impact on 10-year tenor, with (10-year and 30-year) maturities of EMEs, a dynamic noticeable effects on the 2-year and 30-year maturities; panel GMM (Ogaki, 1999) is estimated based on however, the impact on 3-month yields is negligible.Chapter V External Environment System GMM Results – EMEs Government Bond underscore the sensitivity of EME debt markets to US Yields financial conditions. Variable 3M Yield 2Y Yield 10Y Yield 30Y Yield References: Policy rate 0.943*** 0.196*** 0.115*** 0.069*** Albagli, E., Ceballos, L., Claro, S., & Romero, D. CPI -0.082 0.168*** 0.108*** 0.048 (2018). “Channels of US monetary policy spillovers to Fiscal balance 0.029 -0.036* -0.048*** -0.060** to GDP international bond markets”. BIS Working Papers No US yield 0.610 0.407*** 0.534*** 0.381** 719, 2018. Exchange Rate 0.009 -0.004** -0.010*** 0.001 Moore, J., Nam, S., Suh, M., & Tepper, A. (2013). Constant 0.005 -0.016 -0.028 0.007 Notes: 1. p < 0.01 = ***, p < 0.05 = **, p < 0.1 = * “Estimating the Impacts of U.S. LSAPs on Emerging 2. Presumed exogenous variables are the policy rate and fiscal Market Economies’ Local Currency Bond Markets”. balance. The model specification is consistent with the Hansen J-test of instrument validity. Federal Reserve Bank of New York staff report no. 595, 3. A positive fiscal balance means fiscal surplus and negative 2013. balance means fiscal deficit. Similarly, a positive change in exchange rate means appreciation and negative change means Avalos, F., Todorov, K., & Xia, D. (2025). “US spillovers depreciation. amid macroeconomic divergence”. BIS Quarterly This maturity-specific impact indicates that while Review, March 2025. domestic factors anchor short-term rates, US yields exert greater influence on term premia and long-term Ogaki, M., (1999). “GMM Estimation Techniques”. yields that can reduce the diversification benefits Ch.2 in Generalized Method of Moments Estimation. for international investors. Overall, the findings Cambridge University Press, 1999. In the currency market, the US dollar remained first half of May after depreciating in April, supported subdued, while emerging market currencies gained by the US–China interim trade deal and strong as investors diversified towards emerging market employment data. In the latter half of Q2, however, assets (Chart V.11a). The US dollar rebounded in the the dollar depreciated significantly as investors grew Chart V.11: Currency Movements and Capital Flows a. Currency Indices b. Portfolio Flows to EMEs Index (end-2023=100) (US$ billion) 107 106 105 103 101 99 97 97 95 MSCI EME Currency Index US Dollar Index Debt Equity Total Sources: Bloomberg; Institute of International Finance; and RBI staff estimates. 110011 42-naJ-50 42-beF-90 42-raM-51 42-rpA-91 42-yaM-42 42-nuJ-82 42-guA-20 42-peS-60 42-tcO-11 42-voN-51 42-ceD-02 52-naJ-42 52-beF-82 52-rpA-40 52-yaM-90 52-nuJ-31 52-luJ-81 52-guA-22 52-peS-62 12 6 0.2 -4.1 -4.4 -6 -12 -18 -24 42-naJ-5 42-beF-9 42-raM-51 42-rpA-91 42-yaM-42 42-nuJ-82 42-guA-2 42-peS-6 42-tcO-11 42-voN-51 42-ceD-02 52-naJ-42 52-beF-82 52-rpA-4 52-yaM-9 52-nuJ-31 52-luJ-81 52-guA-22 52-peS-62 0Monetary Policy Report October 2025 wary of its safe-haven appeal amidst rising public to local developments, including political instability debt concerns. In July, the dollar appreciated on in Indonesia, renewed tariff risks in Latin America, optimism surrounding multiple trade agreements India and weak Chinese economic data. and the de-escalation of conflict between Iran and V.5 Conclusion Israel, easing fears of potential US involvement. The global macroeconomic environment remains The dollar remained volatile in Q3, with changing fraught with considerable risks. The rise in tariffs investor sentiment amid incoming data releases. In has heightened the risk of supply chain disruptions 2025 so far, the US dollar has fallen by 9.5 per cent, as that could impede the ongoing disinflation process unpredictable policy decisions unsettled investors. and constrain the space for monetary policy easing. These movements were mirrored in EME currencies, For emerging market economies, the external exacerbated by swings in capital flows (Chart V.11b). environment poses several challenges including weak The MSCI emerging market currency index rose by global growth, high tariffs, heightened uncertainty, 5.3 per cent in Q2; however, Q3 saw a reversal due volatile capital flows, and geopolitical tensions. 102