The Reserve Bank of India’s repo rate decision on Wednesday will likely be a close call, with Monetary Policy Committee (MPC) members facing multiple reasons to lower borrowing costs as inflation stays low and economic growth takes a knock from high US tariffs, as per a Bloomberg report.
While a majority of economists — 24 of 38 surveyed by Bloomberg News — predict the repurchase rate will remain on hold at 5.5%, 14 expect a quarter-point reduction, citing India’s darkening growth prospects. Even many of those forecasting a hold say there’s justification to ease.
Echoing a similar opinion, Bank of Baroda Economist Sonal Badhan also said that the central bank is expected to maintain the policy rate unchanged, with a rate cut of 25 basis points (bps) being seen as a "positive surprise."
The six-member MPC, led by Governor Sanjay Malhotra, will need to juggle a number of objectives this week. Inflation, which is hovering near the lower end of the 2%–6% target band, is expected to ease further after recent tax cuts, while growth is likely to face a hit from US President Donald Trump’s 50% tariffs.
Meanwhile, the rupee’s fall to a record low and Malhotra’s careful stance on rate reductions make easing more challenging. The RBI has cut rates by 100 basis points this year but held them steady at the August MPC meeting.
RBI likely to keep interest rates on hold
Speaking on the possible impact of such a move with ANI, Badhan noted that even if the RBI goes ahead with a 25 bps cut in October, the GDP forecast for FY26 is unlikely to see any revision.
"Even if RBI decides to cut rate by 25bps, GDP forecast for FY26 is likely to remain unchanged as changes to monetary policy usually takes 2-3 quarters to show it's impact on the real economy" she said.
On the central bank's likely stance if it holds rates steady, Badhan highlighted that the commentary could lean dovish.
"We believe that considering RBI has limited room to cut rates, it is more likely that the commentary will be dovish with approx. 50bps reduction in RBI's FY26 inflation projection. This in itself will provide relief to bond yields. However, stance is likely to be kept unchanged at 'neutral' she added.
The governor’s commentary and outlook on economic growth will be closely watched for signals of future monetary policy. Economists see scope for the repo rate to drop as low as 5% in this cycle.
Inflation and Growth Projections
The central bank is likely to keep its growth forecasts unchanged, while trimming its inflation projections.
Even though inflation ticked up in August to 2.07%, the outlook remains benign, supported by above-normal monsoon rains and cuts in the consumption tax. The RBI had predicted inflation of 3.1% for the current fiscal year that started in April. Gaurav Kapur, an economist with IndusInd Bank, estimates average inflation of about 2.7% for the year.
The tax cuts are also expected to help offset the drag from tariffs and keep growth near the upper end of the government’s 6.3%–6.8% forecast range, a top official said. The RBI’s projection is for 6.5% growth this fiscal year.
India's economy grew a stronger-than-expected 7.8% in the June quarter, but some economists said the figure may overstate the actual strength of the economy because it was calculated after adjusting for inflation.
While a majority of economists — 24 of 38 surveyed by Bloomberg News — predict the repurchase rate will remain on hold at 5.5%, 14 expect a quarter-point reduction, citing India’s darkening growth prospects. Even many of those forecasting a hold say there’s justification to ease.
Echoing a similar opinion, Bank of Baroda Economist Sonal Badhan also said that the central bank is expected to maintain the policy rate unchanged, with a rate cut of 25 basis points (bps) being seen as a "positive surprise."
The six-member MPC, led by Governor Sanjay Malhotra, will need to juggle a number of objectives this week. Inflation, which is hovering near the lower end of the 2%–6% target band, is expected to ease further after recent tax cuts, while growth is likely to face a hit from US President Donald Trump’s 50% tariffs.
Meanwhile, the rupee’s fall to a record low and Malhotra’s careful stance on rate reductions make easing more challenging. The RBI has cut rates by 100 basis points this year but held them steady at the August MPC meeting.
RBI likely to keep interest rates on hold
Speaking on the possible impact of such a move with ANI, Badhan noted that even if the RBI goes ahead with a 25 bps cut in October, the GDP forecast for FY26 is unlikely to see any revision.
"Even if RBI decides to cut rate by 25bps, GDP forecast for FY26 is likely to remain unchanged as changes to monetary policy usually takes 2-3 quarters to show it's impact on the real economy" she said.
On the central bank's likely stance if it holds rates steady, Badhan highlighted that the commentary could lean dovish.
"We believe that considering RBI has limited room to cut rates, it is more likely that the commentary will be dovish with approx. 50bps reduction in RBI's FY26 inflation projection. This in itself will provide relief to bond yields. However, stance is likely to be kept unchanged at 'neutral' she added.
The governor’s commentary and outlook on economic growth will be closely watched for signals of future monetary policy. Economists see scope for the repo rate to drop as low as 5% in this cycle.
Inflation and Growth Projections
The central bank is likely to keep its growth forecasts unchanged, while trimming its inflation projections.
Even though inflation ticked up in August to 2.07%, the outlook remains benign, supported by above-normal monsoon rains and cuts in the consumption tax. The RBI had predicted inflation of 3.1% for the current fiscal year that started in April. Gaurav Kapur, an economist with IndusInd Bank, estimates average inflation of about 2.7% for the year.
The tax cuts are also expected to help offset the drag from tariffs and keep growth near the upper end of the government’s 6.3%–6.8% forecast range, a top official said. The RBI’s projection is for 6.5% growth this fiscal year.
India's economy grew a stronger-than-expected 7.8% in the June quarter, but some economists said the figure may overstate the actual strength of the economy because it was calculated after adjusting for inflation.
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