If you have been a borrower, 2025 has perhaps been kind with the Reserve Bank of India (RBI) slashing its benchmark repo rate by 100 basis points (1 per cent), from 6.50 per cent to 5.50 per cent. The monetary policy committee of the Reserve Bank meets next week, and one wonders if there will be another rate cut after a status quo in August.
Through 2024, the interest rates were left unchanged amid high inflation. However, with inflation cooling this year, while several geopolitical and trade-related uncertainties are ongoing, the MPC saw room to slash the rate at which it lends money to commercial banks. So, which direction will the MPC move next week?
On the one hand, CPI (consumer price index) inflation remains benign. CPI inflation rose in August to 2.07 per cent from 1.6 per cent in July, but it is still way below the targeted 4 per cent. However, there are worries emerging about food inflation, with heavy rain in the past few weeks damaging crops in several states from Punjab to Maharashtra.
Separately, India’s GDP growth has been strong; India’s economy grew 7.8 per cent in the April-June quarter, the fastest pace it has clocked in five quarters. Domestically, an expected pickup in consumption due to the recent GST cuts on consumer goods is expected to drive the economy up further, while price reductions could further cool inflation.
However, there are pressures emerging on the economic front too from the external front, with the higher 50 per cent tariffs announced by the United States on imports from India threatening to hurt India’s exports. In the latest move, President Donald Trump announced 100 per cent tariffs on branded and imported pharma products.
Repo rate by at least 25 bps likely?
With inflation well under control and external growth pressures emerging, some expect the RBI MPC could cut the repo rate by at least 25 bps this time around.
Soumya Kanti Ghosh, the group chief economic advisor at State Bank of India, believes its too close to call, but a 25 bps rate cut looks “the best fit.”
“Post June 2025 rate cut, GST rationalisation creating multiplier effects and benign inflation trajectory, there is a need to recalibrate stance to mitigate market confusion regarding future path for monetary policy,” he noted.
Ghosh believes that CPI inflation could further decline by 65-75 bps due to huge GST rationalisation. There is likely to be another 20-30 bps moderation with the new CPI series that is expected to come into effect in 2026 with an updated base year. Therefore, the indication is that CPI will remain around the lower end of the 2 per cent to 6 per cent band through the entire current financial year ending March 2026, as well as the year ending March 2027, said Ghosh.
Or will it be a tactical pause?
CAREEdge Rating’s chief economist Rajani Sinha, however, feels the MPC may prefer to pause at this stage and assess how the macroeconomic landscape evolves, having already front-loaded the rate cuts.
“Previous rate cuts by the RBI and policy reforms, such as GST rate cuts, could somewhat cushion the shocks from tariff disruptions, provided a trade deal with the US is reached soon. A tactical pause in the October meeting by RBI would also preserve policy space should tariff disruptions prolong and downside risks to growth materialise at the macro level,” said Sinha.
However, should growth risks intensify materially, the RBI may consider cutting repo rate in December, she added.
Radhika Rao, senior economist at DBS Bank, too expects the MPC to keep the repo rate unchanged next week, considering growth remains firm, demand is expected to get a boost, while on the other hand, the rupee is under pressure and the inflation is also expected to inch up gradually.
According to her, there is a 30 per cent probability of a rate cut if it sees reason in front-loading action, but even a dovish commentary this time around could achieve the desired outcome. The forward guidance will then be a key thing to watch.
“We expect the MPC to highlight that they have room and willingness to act, if required, effectively wait till December to gauge the impact of tariffs before easing further,” Rao stated.
Santanu Sengupta, chief India economist at Goldman Sachs, also expects the MPC to keep the repo rate on hold at 5.50 per cent next week, while delivering a dovish stance and awaiting fuller transmission of the earlier cuts.
As per RBI’s assessment in August, the weighted average lending rate (WALR) of scheduled commercial banks declined by 71 bps for fresh rupee loans and 39 basis points for outstanding rupee loans from February 2025 to June 2025.
“Even as we expect headline inflation to remain benign and below RBI’s target over the next two quarters, growth signals are mixed: the Q2 (April-June) quarter surprise and prospective support from GST rate cuts are constructive, while trade-policy uncertainty is weighing on the outlook,” said Sengupta.
In the baseline, he expects another 25 bps rate cut in December, taking the repo rate to 5.25 per cent. But, as a risk case, if the RBI views growth risks from trade-policy uncertainty as more skewed to the downside, or judges the pass-through of GST rate cuts to inflation as higher than estimates, the MPC could bring forward the 25 bps cut to October, noted Sengupta.
Ratings agency ICRA is also expecting a status quo on rates in the upcoming MPC meeting.
The Reserve Bank had in August forecast the GDP growth at 6.5 per cent for the current financial year, while projecting CPI inflation at 3.1 per cent.
But, several things have changed since that assessment from August 4-6. For instance, the GST rationalisation plan was only approved by the GST Council in its meeting on September 3. Will the RBI now tweak its inflation forecast for the year is something to watch out for.
