Are you a home loan borrower and were closely watching the Reserve Bank of India’s monetary policy announcement, hoping your interest rate burden and EMI would go down further? No such good news this time as the monetary policy committee (MPC) chose to keep the repo rate on hold at 5.50 per cent after the bonanza in June when it had slashed the benchmark rate at which it lends money to commercial banks by 50 bps (0.50 per cent).
Last time around, the RBI MPC had surprised markets, taking advantage of falling retail inflation to front-load interest rate cuts. But, even as the inflation has fallen further, the central bank chose to stay put this time, given the uncertainty around the trade tariffs and their lingering impact.
RBI Governor Sanjay Malhotra noted that while headline inflation was much lower than projected earlier, it was mainly due to vegetable prices, and core inflation had remained steady around the 4 per cent mark. While growth was robust, albeit below its aspirations, the tariff-related uncertainties were still evolving, he added.
Furthermore, he pointed out that the transmission of the 100 basis points in earlier repo rate cuts since February 2025 was continuing, and its impact on the economy was still unfolding.
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“On balance, therefore, the current macroeconomic conditions, outlook and uncertainties call for continuation of the policy repo rate of 5.5 per cent and wait for further transmission of the front-loaded rate cut to the credit markets and the broader economy,” said Malhotra.
What’s also worth noting is the 100 bps cut in the cash reserve ratio that the RBI had announced in June. This is going to be staggered over four equal tranches of 25 bps starting in September, and this should further support liquidity conditions.
In the credit market, the weighted average lending rate of scheduled commercial banks declined by 71 basis points for fresh rupee loans and 39 basis points for outstanding rupee loans from February 2025 to June 2025. On the deposit side, the weighted average domestic term deposit rate on fresh deposits moderated by 87 bps in the same period. This transmission is expected to continue going ahead, too, as the CRR cut boosts system-wide liquidity further.
The Governor said the MPC resolved to maintain a close vigil on the incoming data and the evolving domestic growth-inflation dynamics to chart out the appropriate policy path.
Amid the global geopolitical tensions and tariff-related uncertainties, India’s GDP growth has been stable so far. However, the US administration’s recent announcement of 25 per cent import tariffs on India is a worry, and economists say it could shave off a few basis points of India’s growth.
In this backdrop, the RBI has maintained its GDP growth forecast for the current financial year ending March 2026 at 6.50 per cent. It sees GDP growing 6.5 per cent in the April-June quarter, 6.7 per cent in the September quarter, 6.6 per cent in October-December and 6.3 per cent in the March quarter.
“The above normal south-west monsoon, lower inflation, rising capacity utilisation, and congenial financial conditions continue to support domestic economic activity. The supportive monetary, regulatory and fiscal policies, including robust government capital expenditure, should also boost demand,” said Malhotra.
At the same time, he flagged uncertain external demand prospects amid ongoing tariff announcements and trade negotiations.
“The headwinds emanating from prolonged geopolitical tensions, persisting global uncertainties, and volatility in global financial markets pose risks to the growth outlook,” the Governor stressed.
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The MPC, though, has slashed its CPI (consumer price index) inflation forecast sharply for the current financial year. RBI now sees CPI inflation at 3.1 per cent this year, compared with its earlier projection of 3.7 per cent. It sees inflation at 2.1 per cent and 3.1 per cent in the second and third quarters, respectively. However, according to its assessment, inflation is then expected to shoot up to 4.4 per cent in the January-March quarter of 2026 and further up to 4.9 per cent in April-June 2026.
“The inflation outlook for 2025-26 has become more benign than expected in June. Large favourable base effects combined with steady progress of the south-west monsoon, healthy kharif sowing, adequate reservoir levels and comfortable buffer stocks of foodgrains have contributed to this moderation. CPI inflation, however, is likely to edge up above 4 per cent in Q4 and beyond, as unfavourable base effects and demand-side factors from policy actions come into play,” noted Malhotra.
There is a mixed picture when looking at the external sector. India’s current account deficit moderated to 0.6 per cent of GDP in 2024-25, but the merchandise trade deficit further widened in the first quarter of this financial year. While gross foreign direct investment (FDI) has remained strong, net FDI has moderated due to higher outward FDI. India’s foreign exchange reserves stood at $688.9 billion as of August 1, 2025.