The US tariff headwinds have been blowing in hot for months now, threatening to challenge India’s growth outlook. Expert opinion is divided on whether the Reserve Bank of India (RBI) will go in for another interest rate cut in its upcoming bi-monthly monetary policy meeting this week despite potential inflation risks.
Most opine the central bank will likely hold the key short-term lending rate at 5.5 per cent, since it has already effected three back-to-back reductions in the short-term lending rate (repo), cumulating to 100 basis points (bps) since February this year.
The RBI Governor Sanjay Malhotra-headed six-member rate-setting panel – the Monetary Policy Committee (MPC) – is scheduled to announce the next bi-monthly policy rate on Wednesday (August 6). The three-day meeting of the MPC will start on Monday.
Also Read: RBI to 'wait and watch’ before further rate cuts
Bank of Baroda’s Chief Economist, Madan Sabnavis, said it would be interesting to see how the RBI looks at the latest tariff number of 25 per cent although he doesn’t believe the credit policy would be based on it.
"The tariff per se may not really change the view on growth, though it would be interesting to see how the RBI looks at this number. There can be a slight downward revision in inflation projection for the year by 0.1-0.2 per cent, i.e. 3.5-3.6 per cent instead of 3.7 per cent," Sabnavis said, adding that the policy already would have buffered in the 26 per cent tariff in June, which was the deferred rate in April.
However, in the current context, the cost of oil for the economy will also be a consideration.
"Therefore, we do not expect any change of stance or policy rate this time. The tone will be more cautious with some comfort being drawn on the resilient growth front," he pointed out.
CareEdge Ratings has predicted the RBI would hold off on further easing of rate cuts since it had anticipated moderation in inflation, and instead allow time for the full impact of earlier measures to materialise.
"Hence, we do not expect further rate cuts unless growth concerns aggravate. While the US reciprocal tariff rate and proposed penalty are concerning, the RBI may opt to wait till we get further clarity on this front. With a forward-looking outlook, the RBI would be focusing on inflation in the quarters ahead," it said.
The Consumer Price Index (CPI)-based retail inflation has remained below 4 per cent since February. It was at 2.1 per cent in June.
The government has mandated the RBI to ensure inflation remains at 4 per cent with a margin of 2 per cent on either side.
However, there are others, such as Dharmakirti Joshi, Chief Economist at rating agency, Crisil Limited, who anticipates a 25 basis point reduction in the repo rate.
“We anticipate a 25 basis point reduction in the repo rate, as inflation has been lower than anticipated and, overall, the risks to growth currently surpass those related to inflation,” she opined.
Aditi Nayar, Chief Economist at rating agency Icra, also believes that with the recent CPI prints signalling a lower trajectory for the second half of this calendar year, the average for FY2026 is likely to be pared from the MPC's June 2025 guidance of 3.7 per cent.
"Further, the tariffs imposed by the US will pose a downside risk to GDP growth, while admittedly injecting volatility into the INR. In our view, the balance remains slightly tilted towards a final rate cut of 25 bps in the August 2025 policy review," Nayar said.
The MPC consists of three RBI officials – Sanjay Malhotra (Governor), Poonam Gupta (Deputy Governor), Rajiv Ranjan (Executive Director) and three external members – Nagesh Kumar (Director and Chief Executive, Institute for Studies in Industrial Development, New Delhi), Saugata Bhattacharya (Economist), and Ram Singh (Director, Delhi School of Economics).
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