RBI likely to play it like a Test match: Repo rate cut unlikely in August policy meeting

RBI Monetary Policy Preview

Much like the gripping 4th Test match between India and England, where the Indian team delivered a clutch batting performance on Day 5 to draw the match on foreign soil, the Reserve Bank of India (RBI) may show similar poise under pressure in the upcoming policy. After cutting the repo rate three times this year—in February, April, and June—bringing it to 5.50 percent, the RBI’s Monetary Policy Committee (MPC) now faces its next decision on August 6, 2025.

Looking at the commentary from decision makers in MPC after last policy and thereafter, it seems that it may be a tactical pause on rates in August 2025 MPC meeting. The frontloading of rate easing in June 2025 MPC meeting has provided cushion, providing MPC a room to observe and adapt. Drawing strength from robust domestic macro fundamentals, the central bank has held its ground despite an unpredictable global climate amidst various uncertainties.

RBI has projected Indian GDP growth for FY26 at 6.50 percent in the last policy. RBI is likely to maintain the same in upcoming policy. However, rough weather could be brewing on the trade front. US President Donald Trump’s 25 percent tariff hike—coupled with penalties could dent growth by an estimated 30-40 basis points as per estimates. Still, market participants remain cautiously optimistic that these trade barriers are transient and negotiations will eventually yield a balanced agreement.

Inflation, meanwhile, is playing its part in easing the pressure. Headline inflation for June 2025 dropped to 2.10 percent, the lowest since January 2019. Food inflation came in negative at -1.06 percent, bolstered by a 19 percent decline in vegetable prices. Core inflation hovered around 4.43 percent. Favourable monsoon rainfall, already above normal for June and which remained strong in July also, has spurred kharif sowing activity—up 11.30 percent year-over-year as of June 27—and helped replenish reservoir levels. This bodes well for agricultural output and further disinflation.

Analysts anticipate the RBI may revise its FY2026 headline inflation projection downward to a range of 3.40 percent–3.50 percent, from its earlier estimate of 3.70 percent. However, RBI Governor in his recent media interaction has mentioned that monetary policy s forward looking. As per various market estimates, inflation for Q4FY26 is likely to be around 4-4.5 percent (RBI has projected 4.40 percent for this period in last policy).

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Abhishek Bisen

Head - Fixed Income|Kotak Mahindra Asset Management Company

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Liquidity remains abundant. As of July 30, the banking system shows a surplus of Rs 2.68 lakh crore—more than 1 percent of NDTL (Net Demand and Time Liabilities), aligning with RBI’s preferred buffer. The weighted average call rate stood at 5.37 percent, beneath the repo rate. The upcoming policy may unveil a refreshed liquidity framework, including a shift to a 7-day Variable Rate Repo (VRR) in place of the 14-day term, a fixed-rate repo window equivalent to 1 percent of banks' NDTL, and the introduction of a Secured Overnight Reference Rate (SORR) for overnight lending.

US Federal Reserve maintained its policy rate between 4.25 percent–4.50 percent in its July 2025 FOMC, citing persistent inflation above target. Advance estimate of US GDP for Q2CY25 pegged the GDP growth at 3 percent surpassing the expectation. This was followed by contraction of 0.5 percent in Q1CY25. With this background the Fed Fund Futures are now discounting only 1 rate cut by FOMC in balance part of calendar year of 2025.

Amid the volley of domestic resilience and global uncertainty, the RBI seems set to hold its line, much like a seasoned batsman facing down aggressive deliveries. In its upcoming August policy, it is expected to keep the repo rate steady at 5.50 percent and reiterate a neutral stance. However, given the fall in headline inflation, comfortable food price, good monsoon and to support growth, RBI may just be tempted for a boundary with a 25bps repo rate cut.

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