RBI may take a 'dovish pause' in August meeting, revision in CPI forecast on the cards

Reserve Bank of India

The Reserve Bank of India's Monetary Policy Committee begins its August session later today, against the backdrop of surging global trade tensions, cooling inflation, and currency pressures. Analysts believe that the central bank will undertake a 'dovish pause', with many expecting a downwards revision to the consumer price inflation (CPI) estimates for FY2026.

Over the past three MPC meetings, the RBI has trimmed the benchmark lending rate by 100 basis points, while the policy stance stands at 'neutral.' After front-loading the cuts for the current fiscal year, most experts are pencilling a pause.

"With the RBI having already frontloaded rate cuts and ensured ample liquidity, the MPC may prefer to pause for now and assess how the macroeconomic landscape evolves," said economists at CareEdge Ratings. Additionally, transmission of the previous rate cuts is still underway and could take some more time to show its effect on the economy.

Most economists concurred with the view. "That's not to say that the rate easing cycle in India is over, but it's just about there. We expect the final 25 bps cut of this easing cycle in October," noted Barclays India.

On the flip side, Japan-based brokerage Nomura believes that there is a 35 percent chance of a rate cut in the upcoming meeting, following U.S. President Trump levying 25 percent tariff on India. The brokerage expects a rate cut of 25 basis points in October and December, though.

Trade policies hamper growth prospects

According to experts, U.S. President Trump's tariff policies will cast a  shadow on India’s growth outlook. This might be mitigated to an extent, as India's economy is more domestic-focused and inward-looking. Further, a slowdown in the mining, utilities, and manufacturing sectors, as reflected by the high-frequency indicators for the first quarter, will impact growth.

Additionally, the hawkish stance from the U.S. Federal Reserve, ongoing trade tension with the U.S. and recent appreciation of the U.S. dollar index could provide further reasons for adopting a wait-and-watch approach, as additional pressure on the rupee may emerge, said CareEdge Ratings.

RBI may revise inflation forecast

Retail inflation has continued to cool sharply, led by softening food prices and a favourable base. The June CPI print of 2.1 percent was the lowest print since January 2019, coming in far under expectations.

According to Barclays, the July CPI inflation is tracking at 1.5 percent, which will further soften from the average noted in Q1FY26. As a result, the financial services major noted that lower-than-expected inflation outcomes in Q1 have implied meaningful downside risks to its full year
FY25-26 CPI inflation forecast of 3.5 percent, which is already 20 basis points under the RBI's estimate of 3.7 percent.

CareEdge Ratings, too, noted that the overall inflationary environment is likely to remain favourable over the next few quarters. However, inflation is likely to inch up above the 4 percent mark in the fourth quarter of this fiscal year as the favourable base effect wanes. "We accordingly expect the RBI MPC to revise down their CPI inflation forecast for FY25-26 by 30-40 bps from 3.7 percent in the upcoming meeting," it added.

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