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Informist, Wednesday, Aug. 6, 2025

 

By Shubham Rana

 

MUMBAI - The Reserve Bank of India's Monetary Policy Committee has tied its own hands by not cutting interest rates Wednesday. Despite lowering the inflation projection for 2025-26 (Apr-Mar) by 60 basis points to 3.1%, the committee chose not to lower rates in its August meeting. This puts the central bank's rate-setting panel in a situation where now on it can cut interest rates only in response to a sharp slowdown in growth. One wonders if the MPC realises this.

 

RBI Governor Sanjay Malhotra had previously said lower-than-expected inflation could offer space for further monetary policy easing. This space and opportunity went unutilised as the MPC appears to have prioritised the outlook for inflation one year ahead over current growth.

 

The MPC unanimously held the repo rate at 5.50% Wednesday, having lowered it by 100 bps between February and June. It also retained the neutral stance, which, according to Malhotra, allows the MPC to keep rates on hold or move them in either direction. But RBI's growth and inflation projections suggest the repo rate is more likely to remain at 5.50% for a while.

 

To be sure, more rate cuts are not entirely ruled out. Some economists expect a rate cut in the October meeting itself.

 

"De-facto given the inflation projections, the space for another 25-50 bps rate cut remains in place, although the RBI would exercise that only if there is a significant downside risk to growth – both due to domestic activity performance and the tariff impact," HDFC Bank said in a report. "Only if the tariff outcome becomes decisively negative between now and the October policy, the probability of a rate cut could then increase for the October policy."

 

A rate cut this time would have been consistent with the logic given by MPC for the 50-bps cut in June. Malhotra had said in June that the committee had front-loaded 50 bps of rate cut to provide certainty in an "uncertain environment".

 

The governor's comments Wednesday did little to provide that certainty. He said there is still a lot of uncertainty, and it is very difficult to predict the impact of US tariffs on growth.

 

Had the MPC lowered interest rates in this meeting, it would have provided more time for the transmission to the real economy, something Malhotra had focused on since the committee first cut rates in February. A rate cut in October or December in response to US tariffs or slowing growth would take additional time to reflect in lending and deposit rates.

 

INFLATION VS GROWTH

A predicament for the MPC is that it often has to prioritise between growth and inflation. Right now, it seems the committee has given more importance to inflation.

 

"Despite sharply lowering its inflation forecast to 3.1% from 3.7?rlier, RBI's decision to keep rates steady emanates from their focus on 1-year-ahead expected inflation that is looking well above 4%, while growth in their view has held up well, despite global uncertainty," Madhavi Arora, chief economist at Emkay Global Financial Services, said in a note.

 

Malhotra said the inflation outlook for FY26 has become more benign than expected in June, supported by large favourable base effects and steady progress of the southwest monsoon. CPI inflation, however, is likely to edge up to above 4% in the March quarter and beyond as unfavourable base effects come into play, he said.

 

The RBI projects CPI inflation at 4.4% in the March quarter and 4.9% in Apr-Jun of 2026. "However, focusing on 1-year-ahead expected inflation appears increasingly misplaced in an evolving world – particularly as the global landscape continues to shift toward a disinflationary bias in Asia," Arora said.

 

The central bank retained its growth projection for FY26 at 6.5?spite higher risks from the US' tariffs. The US has already announced a 25% tariff on India and US President Donald Trump has threatened to raise this substantially. On Wednesday, the US announced an additional 25% tariff on India for its oil imports from Russia.

 

Malhotra said that growth is holding up and evolving on expected lines but termed the recent set of data as mixed and said growth is below the aspirational level. Asked what the aspirational level of growth is at the post-policy press conference Wednesday, Malhotra said "certainly more than 6.5%" and not the 8% he had mentioned in June.

 

RBI's growth projection is already higher than most professional forecasters and economic activity will most likely face further challenges from US tariffs. The governor said the 6.5% growth estimate, which was lowered from 6.7% in April, already factors in trade-related uncertainties, but it is difficult at present to predict the impact of the US' tariff announcements on India's GDP growth.

 

"While the RBI marked down current year inflation, our sense is that it does not have the same certainty on growth yet, and therefore left it unchanged at 6.5%," economists at HSBC said in a note. "It mentioned the uncertainty around US tariffs on India, and it also mentioned that some of the data in May and June have been more mixed than strong. That suggests to us that the RBI is waiting for more data on growth to trickle in."

 

Economists at Barclays, a bank, said incoming data is likely to fall short of the RBI's 'resilience' expectation and the MPC may deliver a final rate cut of 25 bps in October. "We have previously argued that the window for another cut is quite short, and if the RBI MPC doesn't cut in October, a cut in December will become challenging," Barclays said.

 

The RBI may have used the August meeting to take a breather to reflect on the impact of its actions so far, but Trump's tariffs could mean that the central bank may have missed the chance to lower rates entirely.   End

 

Edited by Tanima Banerjee

 

 

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