Were you disappointed that the Reserve Bank of India left the interest rate unchanged on Wednesday? Well, there are clear signals that there will be at least one more cut ahead, and with the ongoing monetary policy transmission, lending rates could well head further down in the coming months.
Having reduced the repo rate by 100 basis points (1 per cent) in 2025, the RBI’s monetary policy committee left the repo rate on hold at 5.50 per cent for the second consecutive MPC meeting. The decision to maintain the status quo was unanimous, but there are clear indications that there is room for more rate cuts in the future.
“The current macroeconomic conditions and the outlook opened up policy space for further supporting growth,” the RBI Governor Sanjay Malhotra said.
The MPC has comfort on the inflation front, which has turned “benign” and remains well below the 4 per cent target. On the other hand, while domestic growth levers remain strong, and the GDP growth forecast has been revised upwards to 6.8 per cent from 6.5 per cent, after a strong April-June quarter (7.8 per cent), it noted that it continues to be “below our aspirations.”
“Even though the growth projection for the financial year 2025-26 is being revised upwards, the forward-looking projections for the third quarter and beyond are expected to be slightly lower than projected earlier, primarily due to tariff-related developments, despite being partially offset by the impetus provided by the rationalisation of GST rates,” the MPC statement read.
Economists see this policy as more of a dovish pause, as the MPC sees how the impact of various things, from GST cuts to US President Donald Trump’s 50 per cent tariffs, as well as how the ongoing monetary transmission unfolds, before deciding on any future rate cuts. Speaking in the post policy conference, Deputy Governor Poonam Gupta acknowledged there was room, but multiple factors would have to be considered.
“Monetary policy is a forward-looking response. While Q1 numbers have actually been surprisingly good, there is some softness projected in the second half of the year, and inflation numbers also have been surprisingly very benign. So, I guess, taking into account both of those developments, some room has opened. But, it has to be contextualised with everything else that is happening both domestically and globally,” said Gupta.
Rahul Bajoria, head of India and ASEAN economy research at Bank of America Securities, now projects there will be two more 25 bps repo rate cuts, which will take the terminal rate to 5 per cent by February 2026.
“Today’s policy guidance from the governor has opened the door for more rate cuts, and if RBI’s projections for growth and inflation hold, then rate cuts might be unavoidable for the RBI,” said Bajoria.
The pressure on RBI to cut rates could dissipate if India’s trade deal with the US were to be concluded early and export growth rebounds, he noted.
“But, since RBI does not seem to be factoring that in the baseline, we believe balance of risks is for RBI to start moving in December, if current projections broadly hold,” according to Bajoria.
Avnish Jain, head of fixed income at Canara Robeco asset Management Co, also believes that the RBI Governor’s comments on Wednesday around headline inflation falling more than expected and risks to growth from US tariffs open policy space for supporting growth. However, the MPC members would like to wait and watch the full impact of the 100 bps rate cut done so far before taking further action.
“The RBI MPC noted that the overall inflation outlook has become more benign and the wait-and-watch approach was appropriate on global uncertainty on US tariffs as well as the geopolitical situation. This opens space for a rate cut in December policy, depending on evolving growth inflation dynamics,” said Jain.
He added that the US Federal Reserve may further reduce rates on weaker growth there, which may support the narrative of lower rates in India.
Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, also sees scope for 25-50 bps rate cuts by the end of March 2026.
“The growth risks from tariff uncertainties have created room for additional rate cuts if risks materialise,” said Bhardwaj.
Paras Jasrai, associate director at India Ratings and Research, is expecting one more rate cut by the RBI in the current financial year, but said the timing was uncertain, depending on how domestic growth-inflation dynamics, tariff issues and geopolitical developments evolve.
Radhika Rao, executive director and senior economist at DBS Bank, also expects one more rate cut, possibly in December, taking the terminal rate to 5.25 per cent. The MPC is likely to be guided by growth rather than inflation, she said. Risks from external developments, though, could subside if there is a successful trade deal between US and India, she also noted.
