CHENNAI, August 5: The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) can reduce the repo rate by 25 basis points (bps) in its upcoming meeting, as there are several compelling reasons to do so, said a top economist with Emkay Global Financial Services Ltd.
However there are other economists who do not expect the MPC to reduce the repo rate-the rate at which RBI lends to banks- as it has already front loaded the cut in the last meeting.
Economists also believe the reciprocal tariff of 25 per cent levied by the US on imports from India may not have much impact on India’s gross domestic product (GDP) growth.
The six-member MPC is holding its bi-monthly meeting from August 4 6, and RBI Governor Sanjay Malhotra will announce the decisions on August 6.
“There are enough reasons for the RBI to deviate from its previous guidance, deliver a further 25bp easing in August, and be more open-ended in its policy approach/guidance for further easing ahead,” said Madhavi Arora, Lead Economist, Emkay Global.
According to her, the inflation is weak and so is the economic growth and hence there is a case for the MPC to reduce the repo rate by 25 bps.
Since June this year when MPC reduced the repo rate by 50 bps to 5.5 percent the inflation dynamics have turned extremely favorable, led by food and implying that the upcoming few months could see sub 2.0-2.5 per cent prints, and FY26 inflation may undershoot the RBI’s current forecast by as much as 90-100bps, Emkay Global said it its report.
The recent imposition of a 25 per cent reciprocal tariff by the United States on Indian imports further complicates India’s economic outlook. “This move has skewed risks for India relative to Asian peers, even though we reckon that those securing trade deals are not necessarily any better-off,” Arora said in the report.
Together, these internal and external headwinds pose downside risks to the RBI’s FY26 growth forecast of 6.5 per cent, underscoring the need for continued policy support, she added.
According to her, the RBI-MPC need not wait any further when continuity in easing delivers more durable macro outcomes; when global resets could trigger divergent paths and to save the Rupee when it can act as an automatic stabiliser.
On the other hand, Madan Sabnavis, Chief Economist at Bank of Baroda, struck a more cautious note. He said India’s GDP growth is already tracking well towards the 6.5 per cent mark, and the impact of the US tariffs on growth and inflation is one of conjecture. “As a result, the MPC is unlikely to alter its view on rates or stance,” Sabnavis opined.
Continuing further he said there may be an emotional reaction to the tariff announcement by the US. But it must be remembered that the rate is not different from what was announced in May (26 percent) and MPC may not offer a different response.
Sabnavis pointed to Malhotra’s statement during the last policy announcement about the limits for monetary policy driving growth when the front loading was done on rates and the cash reserve ratio (CRR).
Similarly Rajani Sinha, Chief Economist at CARE Ratings discounted any possibility of MPC reducing the repo rate.
“The US reciprocal tariff has added another element of uncertainty and the Central Bank may prefer to wait and get further clarity on that,” Sinha told this writer.
CARE Ratings has maintained India’s GDP growth projection at 6.4percent in FY26 as the recently announced reciprocal tariff could dent GDP by only 0.3-0.4percent.
India’s economic growth momentum will be supported by recent interest rate cuts, strong agricultural activity boosting rural demand, benign inflationary conditions, and a favourable monsoon. However, it will be important to monitor risks from global trade policy uncertainties closely, CARE Ratings said in its report.
“RBI has already front loaded rate cuts factoring in a moderation in inflation. Moreover, RBI will be looking at the likely future trajectory of inflation. With the low base of 2025, consumer price index (CPI) inflation is estimated to rise above 4percent in 2026,” Sinha said.
According to her, the MPC is likely to revise lower the inflation projection for FY26. CARE Ratings lowered it to 3.1percent.
“Overall inflationary environment is likely to remain favourable over the next few quarters. However, inflation is likely to inch up above the 4 percent mark in the fourth quarter of this fiscal year as the favourable base effect wanes.
“CPI inflation is likely to undershoot the RBI’s FY26 projection of 3.7 percent. Accordingly, the RBI may revise its inflation forecast downward. We expect CPI inflation to average around 3.1percent in FY26. Given the low base of FY26, we expect average CPI inflation to be higher, around 4.5percent in FY27,” CARE Ratings report said.
“The previous repo rate cut served as a much-needed catalyst for the real estate sector. For developers, it was a significant move, easing their financial strains. Ahead of the upcoming monetary policy, another rate cut, or even a steady stance, would ease the cost of borrowing, which can help increase demand in both residential and commercial markets,” said Umang Jindal, CEO, Homeland Group.
(UNI)
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