Monetary authorities projected to keep interest rates steady
In a closely watched meeting, the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) decided to keep the repo rate steady at 5.50%, opting for a wait-and-watch approach amidst falling inflation and ongoing uncertainties related to US trade tariffs.
The decision came after the RBI revised down its full-year inflation forecast to 3.1% for the current financial year (FY26), a six-year low, due to easing price pressures. The MPC, however, retained its GDP growth projection at 6.5%, reflecting optimism about the domestic economy.
The MPC's caution was primarily due to external risks, notably uncertainties stemming from US tariffs imposed on Indian goods. RBI Governor Sanjay Malhotra highlighted the unpredictability of the tariff impact on growth, which contributed to the committee’s restraint.
Despite the decision, there is still potential for further rate cuts in the October meeting if growth risks materialize significantly. However, the MPC chose to maintain the status quo to allow previous rate cuts to fully transmit into the economy.
The adverse impact of the US tariff on India is estimated to be 0.3-0.4% of GDP, primarily through the export channel. It's worth noting that India's merchandise exports to the US account for only around 2% of GDP.
The fall in inflation, largely due to a statistical base effect, has seen vegetable inflation, which was high in 2024 at 27%, record sharp deflation, averaging -15% in the last three months. Many other components of the food basket are experiencing low inflation or deflation due to a good monsoon and high base from the previous year.
Looking ahead, CPI inflation is expected to breach the 4% level in Q4 FY26 and average around 4.5% in FY27 with an upward bias. The RBI may decide to wait for further clarity on the trade situation before making decisions about monetary policy.
The central bank's wait-and-watch policy is also influenced by the potential for additional weakening pressure on the rupee and the ongoing transmission of previous rate cuts.
There is potential for India to negotiate a trade deal with the US, leading to lower tariff barriers. This could provide a more favourable environment for the RBI to reconsider its monetary policy stance.
The article was written by the Chief Economist at CARE Edge Ratings.
[1] RBI Press Release: MPC Statement on Monetary Policy, August 2025. [2] The Economic Times: RBI keeps repo rate unchanged at 5.50%, cites US trade tariff uncertainties. [3] Business Standard: RBI MPC keeps repo rate unchanged, cites external risks. [4] Financial Express: RBI MPC keeps repo rate unchanged, cites US trade tariff uncertainties as concern. [5] Livemint: RBI MPC keeps repo rate unchanged, cites US trade tariff uncertainties as key factor.
- The decision to keep the repo rate steady by the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) indicates a wait-and-watch approach, influenced by ongoing uncertainties related to US trade tariffs and the potential for further rate cuts in the October meeting.
- The MPC's projected GDP growth remains at 6.5%, demonstrating optimism about the domestic economy, despite the adverse impact of the US tariff on India being estimated at 0.3-0.4% of GDP, primarily through the export channel.
- As India's merchandise exports to the US account for only around 2% of GDP, there is potential for a trade deal with the US to provide a more favorable environment for the RBI to reconsider its monetary policy stance.
- Facing external risks, notably uncertainties stemming from US tariffs, the RBI revised down its full-year inflation forecast to 3.1% for the current financial year, largely due to a statistical base effect and good monsoon.
- Subscribing to a subscription-based financial news platform or reading articles from sources like the Chief Economist at CARE Edge Ratings, The Economic Times, Business Standard, Financial Express, and Livemint can offer insights into the RBI's moves concerning monetary policy and its impact on the business and economy.
