diff --git a/.gitmodules b/.gitmodules
index 81d066b8b0..c1b0c5a56f 100644
--- a/.gitmodules
+++ b/.gitmodules
@@ -1,7 +1,7 @@
 [submodule "3rdparty/Megatron-LM"]
 	path = 3rdparty/Megatron-LM-workspace/Megatron-LM
 	url = https://github.com/yaoyu-33/Megatron-LM.git
-	branch = main
+	branch = yifu/remove_do_not_average_loss
 	shallow = true
 [submodule "3rdparty/Megatron-Bridge"]
 	path = 3rdparty/Megatron-Bridge-workspace/Megatron-Bridge
diff --git a/3rdparty/Megatron-LM-workspace/Megatron-LM b/3rdparty/Megatron-LM-workspace/Megatron-LM
index 193463c4f8..b12071b947 160000
--- a/3rdparty/Megatron-LM-workspace/Megatron-LM
+++ b/3rdparty/Megatron-LM-workspace/Megatron-LM
@@ -1 +1 @@
-Subproject commit 193463c4f8414e6906a40dd527a450bca50706b1
+Subproject commit b12071b947f9ee3c6616306662069fc4ca77be4c
diff --git a/nemo_rl/models/megatron/train.py b/nemo_rl/models/megatron/train.py
index 95ccc3761d..8459eada93 100644
--- a/nemo_rl/models/megatron/train.py
+++ b/nemo_rl/models/megatron/train.py
@@ -220,7 +220,6 @@ def megatron_forward_backward(
     defer_fp32_logits: Optional[bool] = False,
     global_valid_seqs: Optional[torch.Tensor] = None,
     global_valid_toks: Optional[torch.Tensor] = None,
-    do_not_average_loss: bool = False,
     straggler_timer: Optional[StragglerDetector] = None,
 ) -> Any:
     """Execute forward and backward passes using Megatron's utilities.
@@ -241,7 +240,6 @@ def megatron_forward_backward(
         defer_fp32_logits: Whether to skip the conversion of logits to fp32
         global_valid_seqs: Global valid sequence count for loss normalization
         global_valid_toks: Global valid token count for loss normalization
-        do_not_average_loss: If True, do not average loss across microbatches
         straggler_timer: Straggler detector for profiling the forward pass
 
     Returns:
@@ -266,7 +264,6 @@ def megatron_forward_backward(
         micro_batch_size=mbs,
         decoder_seq_length=seq_length,
         forward_only=forward_only,
-        do_not_average_loss=do_not_average_loss,
     )
 
 
@@ -275,10 +272,12 @@ def __init__(
         self,
         loss_fn: LossFunction,
         cfg: PolicyConfig,
+        num_microbatches: int = 1,
         cp_normalize: bool = True,
     ):
         self.loss_fn = loss_fn
         self.cfg = cfg
+        self.num_microbatches = num_microbatches
         self.cp_normalize = cp_normalize
 
     def __call__(
@@ -325,14 +324,26 @@ def __call__(
 
         if self.cp_normalize:
             cp_size = get_context_parallel_world_size()
-            orig_loss_fn_wrapped = loss_fn_wrapped
+            prev_loss_fn = loss_fn_wrapped
 
             def _div_by_cp_size(*args, **kwargs):
-                loss, metrics = orig_loss_fn_wrapped(*args, **kwargs)
+                loss, metrics = prev_loss_fn(*args, **kwargs)
                 return loss / cp_size, metrics
 
             loss_fn_wrapped = _div_by_cp_size
 
+        # Counteract Megatron's default loss averaging in schedules.py,
+        # which applies (* cp_size / num_microbatches) to the loss.
+        cp_size = get_context_parallel_world_size()
+        num_microbatches = self.num_microbatches
+        loss_fn_before_mcore_scaling = loss_fn_wrapped
+
+        def _counteract_mcore_loss_averaging(*args, **kwargs):
+            loss, metrics = loss_fn_before_mcore_scaling(*args, **kwargs)
+            return loss * num_microbatches / cp_size, metrics
+
+        loss_fn_wrapped = _counteract_mcore_loss_averaging
+
         return loss_fn_wrapped
 
 
diff --git a/nemo_rl/models/policy/workers/megatron_policy_worker.py b/nemo_rl/models/policy/workers/megatron_policy_worker.py
index d9a1c3d8a3..5f1483ed9a 100644
--- a/nemo_rl/models/policy/workers/megatron_policy_worker.py
+++ b/nemo_rl/models/policy/workers/megatron_policy_worker.py
@@ -318,6 +318,7 @@ def train(
                 loss_post_processor = LossPostProcessor(
                     loss_fn=loss_fn,
                     cfg=self.cfg,
+                    num_microbatches=num_microbatches,
                 )
 
                 rerun_state_machine = get_rerun_state_machine()
@@ -339,7 +340,6 @@ def train(
                         defer_fp32_logits=self.defer_fp32_logits,
                         global_valid_seqs=global_valid_seqs,
                         global_valid_toks=global_valid_toks,
-                        do_not_average_loss=True,
                         straggler_timer=self.mcore_state.straggler_timer,
                     )
 
diff --git a/tests/unit/models/megatron/test_train.py b/tests/unit/models/megatron/test_train.py
index cf261c3d75..24dda67eec 100644
--- a/tests/unit/models/megatron/test_train.py
+++ b/tests/unit/models/megatron/test_train.py
@@ -719,13 +719,15 @@ def test_loss_post_processor_no_packing(
     def test_loss_post_processor_with_cp_normalize(
         self, mock_cp_size, mock_cp_grp, mock_tp_grp, mock_tp_rank
     ):
-        """Test LossPostProcessor with CP normalization."""
+        """Test LossPostProcessor with CP normalization and microbatch pre-scaling."""
         from nemo_rl.models.megatron.train import LossPostProcessor
 
         mock_loss_fn = MagicMock(return_value=(torch.tensor(1.0), {}))
         cfg = {"sequence_packing": {"enabled": False}}
 
-        processor = LossPostProcessor(loss_fn=mock_loss_fn, cfg=cfg, cp_normalize=True)
+        processor = LossPostProcessor(
+            loss_fn=mock_loss_fn, cfg=cfg, num_microbatches=4, cp_normalize=True
+        )
 
         # Set up mock return values for process groups
         mock_tp_grp.return_value = MagicMock()
@@ -736,8 +738,8 @@ def test_loss_post_processor_with_cp_normalize(
         output_tensor = torch.randn(2, 10, 100)
         loss, _ = wrapped_fn(output_tensor)
 
-        # Loss should be divided by CP size (2)
-        assert torch.isclose(loss, torch.tensor(0.5))
+        # Loss should be scaled by num_microbatches / (cp_size * cp_size) = 4 / (2 * 2) = 1.0
+        assert torch.isclose(loss, torch.tensor(1.0))
 
     @patch(
         "nemo_rl.models.megatron.train.get_tensor_model_parallel_rank", return_value=0