India’s inflation has fallen significantly, and the economy, while still chugging along at a good pace, is slowing compared to last year. Enough reason for the Reserve Bank of India’s monetary policy committee to go for another round of interest rate cut, you may think. But, after frontloading monetary easing, with 100 basis points of repo rate cut so far in 2025, how much more appetite does the MPC have to cut further is a key question.
As the MPC meets between August 4 and 6, it has several issues to look at. More importantly, the US administration just slapped 25 per cent import tariffs on India. Tariffs of varying degrees have been levied on many other countries around the world. This will raise the pressures on the global economy and trade, already challenged due to the heightened geopolitical tensions and crisis in the Middle East over the past year.
How these things pan out and how they impact India’s economy is something that will have to be closely watched. The import tariffs imposed by the US are expected to shave a few basis points from India’s economic growth. The sanctions imposed by the European Union on Russia have threatened cheap crude oil imports by Indian companies from there.
Amid all this, one major comforting factor is on the inflation front. Consumer Price Index (CPI) inflation in June 2025 slipped to a low of 2.10 per cent, its lowest since January 2019. CPI or retail inflation was at 2.82 per cent in May 2025. Over the next two quarters, at least, the retail inflation is expected to average below the RBI’s 4 per cent target.
Separately, India still remains among the fastest-growing major economies. In fact, the International Monetary Fund (IMF) recently raised its GDP growth forecast for India in the current financial year ending March 2026 to 6.4 per cent from 6.2 per cent.
However, the 25 per cent tariff levied by the US on Indian imports will have some impact on the growth. According to Rajani Sinha, chief economist at CareEdge Ratings, the potential direct impact of the reciprocal tariffs on India’s GDP could be around 0.3-0.4 per cent (30-40 basis points). Credit ratings agency Fitch revised its India growth forecast to 6.3 per cent from 6.4 per cent for the 2025-2026 financial year.
Sinha opines that with the RBI having already frontloaded rate cuts and ensured ample liquidity, the MPC may prefer to pause for now and assess how the macroeconomic landscape evolves.
“Additionally, the transmission of the previous rate cuts is still underway and could take some more time to show its effect on the economy. Moreover, a hawkish stance from the US Federal Reserve, ongoing trade tension with the US and recent appreciation of the US dollar index could provide further reasons for adopting a wait-and-watch approach, as additional pressure on the rupee may emerge,” said Sinha.
In the previous meeting in June, the MPC sprang a surprise by slashing the benchmark rate at which it lends money to commercial banks by 50 basis points. So far in 2025, the repo rate has been lowered from 6.50 per cent to 5.50 per cent. Notably, even as it cut the interest rate by 50 bps last time, it also changed its policy stance to “neutral” from “accommodative,” perhaps signalling there was limited room for cuts ahead.
The Fed maintaining a pause, RBI’s own guidance, global trade uncertainties and space for further transmission, will keep the MPC on hold, also felt Ankita Pathak, macro strategist and global equities fund advisor at Ionic Asset.
“It is an opportunistic time for RBI to reflate the economy with at least another 25 bps cut as inflation pressures abate, growth remains in moderation and immediate currency worries are lower. However, the timing of it remains a question, and most likely RBI will hold status quo in the August policy and deliver the cut in the second half of FY2026,” said Pathak.
HSBC economists also expect the RBI to leave interest rates unchanged for now as it awaits the impact of the large easing it has already done.
Soumya Kanti Ghosh, the group chief economic advisor at State Bank of India, however, believes the RBI could frontload another 25 bps rate cut in this policy.
He pointed out that the new CPI series with a lower weightage of food and more weightage to e-commerce could imply average CPI inflation continuing to undershoot and staying below 4 per cent even in 2026-2027.
“No point committing a type II error today by not cutting rates in August, as inflation will continue to remain rangebound even in FY27. 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 the output gap continues to weaken,” explained Ghosh.
A frontloaded rate cut this time could bring early festivities; empirical evidence suggests a strong pick up in credit growth whenever the festive season has been early and has been preceded by a rate cut, according to him.
Nomura economists Sonal Varma and Aurodeep Nandi expect a 25 bps cut in October and another 25 bps cut in December, which will take the repo rate to 5 per cent. But, they believe the probability of a cut in this upcoming policy meeting has risen to 35 per cent from 10 per cent.
“We expect the tariff news to increase the likelihood of monetary policy easing. The RBI has not formally revealed its baseline tariff assumptions, but we believe 25 per cent will likely be a negative surprise,” they said.
The Nomura economists have left their India GDP growth forecast for FY2026 unchanged at 6.2 per cent, but have now flagged a downside risk of 0.2 per cent in case the tariffs remain at 25 per cent.
The RBI had in the previous policy meet retained its GDP growth forecast for the year at 6.5 per cent.
