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Informist, Monday, Aug. 4, 2025

 

By Shubham Rana

 

NEW DELHI – The Reserve Bank of India's Monetary Policy Committee may be widely expected to keep interest rates on hold Wednesday but the current growth and inflation dynamics allow the rate-setting panel to lower the repo rate once again. Not only that, the need for a rate cut now is probably far greater than it was in June.

 

In June, the MPC  had cut the repo rate by a larger-than-expected 50 basis points and changed the stance to neutral from accommodative. RBI Governor Sanjay Malhotra had also said that with 100 bps of rate cuts in 2025, monetary policy was left with "very limited space to support growth". This led to the consensus view that MPC would not lower rates in August and might wait till the December quarter for the next rate action.

 

But with inflation at a six-year low, concerns over slowing economic growth, which have been exacerbated with the imposition of tariffs by US President Donald Trump, make a strong case for a repo rate cut in August itself.

 

CPI inflation fell to a 77-month low of 2.1% in June and is expected to have declined to below 2% in July. It averaged 2.7% in the June quarter, 20 bps lower than the RBI's forecast of 2.9% for the quarter. This is not a blip; economists now expect inflation to average around 3% in FY26, well below the RBI's forecast of 3.7%.

 

Malhotra has said lower than expected inflation could offer space for further easing of monetary policy. Last month, the RBI governor said inflation projections could be revised down at the August MPC meeting, "given that inflation is coming in lower than our projections".

 

"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," Soumya Kanti Ghosh, group chief economic advisor at State Bank of India, said in a report. "At this point, the marginal benefit of waiting is low, while the cost of inaction in terms of forgone output, investment sentiment is likely to be significant."

 

While inflation is expected to stay well below the RBI's medium-term target of 4% this year, growth remains far from the aspirational 8% mark Malhotra mentioned at the June meeting. The RBI projects the Indian economy will grow 6.5% in FY26 but economists expect growth will be around 6.3%.

 

The MPC had "front-loaded" its rate cuts in June to accelerate growth. But the outlook has since worsened because of the 25% tariff imposed by the US on import of goods from India. Economists expect the US tariffs to lower India's GDP growth by 20-30 bps in FY26, which would take economists' growth estimates to 6%. This would clearly be a far cry from the aspirational 8% the RBI governor wants to help achieve. Adding to the uncertainty is Trump's announcement that India will face a penalty, which remains unspecified, for its military and oil trade with Russia.

 

India and the US are working on a trade deal but the relationship between the two sides appears to have soured recently. On Thursday, Trump called India's economy "dead" and US Treasury Secretary Scott Bessent said Washington's trade team was frustrated with New Delhi.

 

"Even without that tariff announcement, a case could be made for a 25 bps rate cut," ANZ Bank India said in a report. "The 25% tariff rate is an added growth shock, which will likely compel the MPC to act pre-emptively to support growth while inflation is not an issue."

 

A key reason why the MPC could lower rates this week is the logic applied at the last meeting for the 50-bps cut. Malhotra had said that the MPC had front-loaded 50 bps of rate cut to provide certainty in an "uncertain environment".

 

If the RBI is thinking of lowering its inflation forecast and if it thinks there is scope for further reducing interest rates this year, it could lower cut the repo rate in August itself to provide certainty about supporting growth.  End

 

Edited by Avishek Dutta

 

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