RBI Likely To Hold Short-Term Lending Rate, Say Experts
RBI has already effected three back-to-back reductions in the short-term lending rate, cumulating to 100 basis points.
The Reserve Bank is likely to hold the key short-term lending rate at 5.5% in its upcoming bi-monthly monetary policy on Wednesday after three back-to-back reductions, notwithstanding the headwinds to near-term economic growth in the wake of elevated US tariff uncertainties and subdued inflation trends, according to experts.
However, some experts opined that the central bank may go for another round of rate cuts as challenges to the growth outlook outweigh potential inflation risks.
The central bank has already effected three back-to-back reductions in the short-term lending rate (repo), cumulating to 100 basis points (bps).
RBI Governor Sanjay Malhotra headed a 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.
Bank of Baroda Chief Economist Madan Sabnavis said the credit policy will not be based on the most recent developments of low inflation for June and the 25% US tariff.
In June, he said, the policy already would have buffered in the 26% tariff, which was the deferred rate in April.
"Therefore, 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%, i.e. 3.5-3.6% instead of 3.7%," Sabnavis said.
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 said the RBI had already frontloaded the rate cuts, anticipating the moderation in inflation.
"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.
CareEdge Ratings further said that given the incomplete transmission of the previous rate cuts, the RBI is expected to hold off on further easing, allowing time for the full impact of earlier measures to materialise.
The Consumer Price Index (CPI) based retail inflation has remained below 4% since February. It was at 2.1% in June.
The government has mandated the RBI to ensure inflation remains at 4% with a margin of 2% on either side.
Aditi Nayar, Chief Economist, Icra, opined 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%.
"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.
Dharmakirti Joshi, Chief Economist, Crisil Limited, said, "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."
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), Ram Singh (Director, Delhi School of Economics).
