More Stories

Informist, Saturday, Aug. 2, 2025

MUMBAI – If the Reserve Bank of India's Monetary Policy Committee does not cut the repo rate at its upcoming meeting next week, it risks amplifying future costs, according to a report by the State Bank of India, authored by Soumya Kanti Ghosh, the group chief economic advisor. With inflation in a further downward trajectory and uncertainty around a US-India trade deal, cutting rates now would send a clear signal and reduce confusion at a time when external changes are completely unexpected, the report said. 

The RBI's rate-setting panel has already slashed the repo rate by 100 bps so far in the year to 5.50%. The panel will begin its meeting Monday and announce its decision Wednesday. 

"We expect RBI to continue frontloading with a 25 basis points cut in August policy...We are living in a frontloaded world...No point in backloading or committing a type II error for now," the report said. "A type II error occurs when the central bank fails to reject the null hypothesis, assuming that the inflation undershoot is temporary, and hence does not cut rates — but in reality, inflation remains persistently low and output gap continues to weaken."

The bank expects the average CPI inflation for the current financial year ending Mar. 31 to be around 2.7-2.9%, against the RBI's estimate of 3.7% for the year. Further, with the CPI undergoing a revision in its base year to 2024, the bank expects that the new CPI series to be introduced next year with an expectation that around 43% weightage on food will lead to nearly 20 bps to 30 bps reduction in headline CPI, the report said. 

"With inflation having decisively eased and remained within the RBI's tolerance band for several months, maintaining a restrictive policy stance risks exacerbating output losses that are neither easily reversible," the report said. "Monetary policy operates with lags, and postponing a rate cut until inflation falls further or growth weakens more visibly could result in deeper and more persistent economic damage." The report said the cost of inaction by the RBI's rate-setting panel at the policy review in terms of forgone output, investment sentiment is likely to be significant. 

However, the report said the current deceleration in growth momentum may be masked going forward due to lower inflation which could reduce the gap between the real and nominal GDP. The RBI has estimated the GDP to come at 6.5% for FY26. Additionally, risks due to US President Donald Trump's tariffs are yet to be realised but there is a possibility of disruption in the global economy due to the tariffs, the report said.

The report batted for a cut in rates next week since a low-interest rate regime before Diwali showed to result in better credit growth. The report said that cutting rates now will result in frontloaded transmission as well. 

The report also said that RBI needs to introduce an external benchmark term deposits rate which will help banks to adjust the assets-liability mismatch, as the customers opt for short-term deposits due to higher rate, and opt for long-term loans. However, the report said this option should be applied to only bulk deposit rates as retail deposit rates have likely reached the lowest levels.  End

Reported by Srijita Bose

Edited by Deepshikha Bhardwaj

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist Media Tel +91 (22) 6985-4000 

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2025. All rights reserved.