With Inflation Easing, RBI Waits For Rate Cuts To Work Its Way Through Economy

The Reserve Bank of India has opted to keep the policy repo rate unchanged at 5.5% in its August monetary policy, even as it emphasised that the real impact of its earlier rate cuts is still filtering through the economy.

The central bank has leveraged the room provided by a significant moderation in inflation to front-load monetary policy easing, cutting rates by 100 basis points since February 2025, Governor Sanjay Malhotra said during the monetary policy announcement.

While the rate actions were swift, their full impact on growth and credit revival is still unfolding, Malhotra said.

"At the Reserve Bank, leveraging on the room provided by a significant moderation in inflation, we have taken decisive and forward-looking measures to support growth. The coordinated use of various tools available to us has helped accelerate monetary policy transmission in the current easing cycle," Malhotra said.

Despite global uncertainties, including evolving trade tariffs and oil price volatility, the central bank believes that further policy action at this point would be premature. Instead, it has chosen to maintain a pause and allow previous rate reductions to take full effect.

"On balance, the current macroeconomic conditions, outlook and uncertainties call for continuation of the policy repo rate of 5.5 per cent and wait for further transmission of the front-loaded rate cut to the credit markets and the broader economy," he said.

Following the Governor's commentary, yield on the 10-year benchmark government bond rose by 6 basis points to 6.39% as markets perceived the policy as 'hawkish'. On Tuesday, it closed at 6.33%.

Monetary policy transmission, the process through which rate cuts by the central bank translate into lower borrowing costs for businesses and households, has often been criticised for being slow in India. However, the RBI now sees promising signs of improvement.

Between February and June 2025, lending rates for fresh rupee loans offered by banks have declined by 71 basis points, of which 55 bps is directly attributable to repo rate reductions. Lending rates on outstanding loans have also come down by 39 bps. At the same time, banks have lowered interest rates on fresh term deposits by 87 bps.

"The comfortable liquidity in the banking system has reinforced transmission of the policy repo rate cuts to the money, bond and credit markets during the current easing cycle," he said.

According to the RBI, the softening of lending rates has been broad-based across sectors. Malhotra also said that transmission to the money markets, including commercial papers and bond yields has been faster than to bank credit.

This has prompted large corporates to increasingly tap market-based sources of funding rather than solely rely on bank loans.

SBI Capital Markets expect future rate decisions to be data driven, with at most one cut more in FY26 and corporate spreads could widen as risk pricing gets better.