By R. Suryamurthy
As the Reserve Bank of India’s Monetary Policy Committee (MPC) begins its three-day deliberation from August 4 to 6, all eyes are on Mint Street. Will the central bank pull the trigger on another rate cut, or will it stick to a cautious pause? The stakes are unusually high this time—not merely for inflation or GDP numbers but for the credibility of India’s monetary stance amid an increasingly unpredictable global and domestic landscape. There are no easy answers, but doing nothing may be the costliest option of all.
India is witnessing its lowest inflation in over six years. Consumer Price Index (CPI) inflation fell to 2.1% in June 2025, marking the eighth consecutive month it undershot the 4% target and the fifth time it undershot even the lower threshold of 2%. Disinflation is not just a vegetable story; cereals, pulses, and proteins have also cooled off sharply.
Further, the inflation outlook for the rest of FY26 is benign. Forecasts peg average CPI inflation at 2.7%–3.1%, significantly lower than the RBI’s estimate of 3.7%. Even the FY27 projection, thanks to a revised CPI basket that may lower food weight and boost e-commerce weightage, suggests headline inflation staying below 4%.
This macro backdrop screams for accommodation. Yet, the RBI has maintained a conservative pause since April, despite frontloading 100 bps of rate cuts earlier in the year. The argument has been incomplete transmission, global volatility, and concern over the rupee amid a hawkish Fed.
Steady, but softening India posted a robust 7.4% GDP growth in Q4 FY25, but the growth engine is visibly sputtering in Q1 FY26. High-frequency indicators point to deceleration in manufacturing, utilities, and mining. The output gap remains negative, nominal GDP is weakening due to low deflators, and rural income growth—though stable—isn’t robust enough to carry the recovery alone.
Urban consumption presents a mixed picture: credit card spending is up, but new card issuance and personal loan growth are the weakest in three years. Tractor sales are strong, yet passenger vehicle sales are down. Corporate investment remains government-led; private capex is hesitant. In this context, delaying rate cuts would mean letting growth slip further just as inflation provides space to act.
Another pressing variable is the U.S.-India tariff dispute. With the Trump administration imposing a 25% reciprocal tariff on Indian exports, and uncertainty looming over additional penalties related to crude oil imports from Russia, the trade war could shave off 30–40 bps from India’s FY26 GDP.
If growth takes another leg down in H2 FY26 due to global spillovers, it may be too late to rely on monetary easing to cushion the blow. Monetary policy operates with lags—what the RBI does now will ripple into the economy by Diwali, not by Budget 2026.
This is not just an economic problem—it is a credibility one. The central bank cannot be seen as reactive to crises alone. Proactive easing in a low-inflation, high-uncertainty regime sends the right message to markets and households.
The most compelling argument for a rate cut may not lie in macro statistics but in probabilistic decision theory. As SBI Research notes, we are at risk of committing a Type II error—failing to act assuming inflation undershoot is temporary, only to find later that growth has been needlessly sacrificed.
Empirical research from central banking literature (Ball, Blinder) confirms that missed easing cycles cause deeper output loss than premature cuts. The RBI should not wait for clearer signs of distress when the current data already permits flexibility. As frontloaded Diwali spending approaches, a well-timed rate cut could stimulate credit uptake and sentiment just in time for the festive quarter.
The cost of over-caution is no longer academic—it is real, quantifiable, and potentially irreversible. The macro environment supports it: inflation is under control, the output gap is negative, and transmission from previous cuts is ongoing. Waiting for further confirmation risks locking in underperformance for FY26. Another modest rate cut keeps real policy rates still positive, with no threat of overheating.
The MPC should clearly communicate that more cuts are conditional on data, but the easing cycle is not over. This will anchor market expectations, soften yields, and bolster investment confidence without inviting inflationary speculation.
With 62% of loans now on floating rates, rate cuts transmit faster than before. Still, the RBI should consider an External Benchmark for Bulk Deposits, as suggested by SBI, to avoid asset-liability mismatches that slow transmission.
The U.S. Fed remains hawkish, but India’s external buffers are strong: forex reserves are at $695 billion, and CAD is under 1% of GDP
A modest rate cut will not trigger destabilizing outflows. If needed, RBI can lean on liquidity tools like VRRR or intervene in currency markets.
If the MPC decides to hold rates, citing incomplete transmission or global headwinds, it may inadvertently send a signal that growth is no longer a concern. Worse, it might miss the last real opportunity to act before global and domestic uncertainties intensify later in FY26.
Markets would see this as a loss of nerve. Borrowers would see it as a policy freeze. And consumers, already cautious, may delay purchases.
In a “frontloaded world,” as SBI argues, decisions must precede outcomes. If festive demand, rural recovery, and industrial capex are all frontloaded—or at least expected to be—why should monetary easing lag behind?
India doesn’t need reckless rate cuts. But it desperately needs timely ones. The August MPC meeting offers that window.
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