MPC Poll | RBI may hold rates in August policy to assess new data on inflation

Reserve Bank of India

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is likely to maintain status quo on interest rates in the upcoming review on August 6, according to the Moneycontrol’s poll of 17 economists, bank treasury heads and fund managers.

This is because a pause will allow the RBI to assess incoming data on the impact of monsoons on inflation, and the impact of past rate cuts on the growth trajectory, experts said.

However, a few experts believe that the central bank may cut rates by 25 basis points (Bps) amid sharp easing inflation numbers.

The MPC is expected to meet between August 4 and 6 for another round of rate setting deliberations and by then the country would have witnessed at least a partial spell of monsoon. This would leave RBI with incremental data to take a view on factors affecting interest rate and the subsequent MPC in October this year may be more well informed to take a calculated move on the benchmark rate.

So far, the central bank has reduced repo or the benchmark rate by 100 basis points (Bps) since February to aid growth, with 25 bps each in February and April respectively, and 50 bps in the June policy.

Experts believe that the central bank will maintain its ‘neutral’ stance and keep its tone dovish in the upcoming policy. This tone is targeted at lowering interest rates to increase spending and lending, as well as providing a boost to  faltering economic growth.

The RBI’s annual report 2024-25 also reiterated that a benign inflation outlook and moderate growth warrant a growth-support monetary policy. In the June policy, the RBI had changed the stance to ‘Neutral’ from ‘Accommodative’.

Inflation projection

Most economists and experts are of the view that the central bank will revise down the projections on the Consumer Price Index (CPI) inflation in the August policy taking comfort from the lower food inflation and benign outlook.

Experts believe that the RBI may lower the average CPI inflation by 20-30 bps in the August policy. According to Sakshi Gupta, Economist at HDFC Bank, the RBI may lower CPI Inflation by 20-30bps.

Further, Madhavankutty G, Group Chief Economist at Canara Bank, projects CPI Inflation downwards to 3.2 percent.

The optimism for the lower inflation came after the high frequency food price data for July so far (up to 18th) indicated a further decline in the prices of pulses and some pick-up in prices of cereals, as per RBI’s July bulletin. Further, prices of palm oil continued to soften.

The Q1FY26 CPI inflation reached 2.7 percent, 20 bps lower than the RBI’s estimate of 2.9 percent after the CPI inflation fell further in June.

In the June monetary policy, CPI projections for FY26 were revised down by 30 basis points (Bps), Q1FY26 projections were revised downwards by 70 bps, Q2FY26 revised downwards by 50 bps.

The RBI has reduced its CPI inflation projection to 3.7 percent from its earlier projection of 4 percent for FY26.

“The outlook for inflation points towards benign prices across major constituents,” RBI Governor Sanjay Malhotra said while announcing the June monetary policy.

GDP growth

The central bank is unlikely to change its projection on the GDP growth in the August policy as economists believe that urban demand has not picked up and private capex has remained weak.

The RBI’s July bulletin also mentioned that amidst global economic uncertainties, the front-loading of spending by the central and state governments, with a focus on higher capex, is helping to offset some slowdown witnessed in private capex expenditure.

In order to revive economic momentum, the central bank uses repo rate cuts as a part of broader monetary easing. By making borrowing cheap and increasing spending power, RBI hopes to push GDP growth upwards. GDP growth has been lagging in the last few quarters.

Usually, when credit is cheaper and liquidity improves, it becomes conducive for business to invest more and also allows consumers to spend more, which leads to an increase in demand and sets off a virtuous cycle of growth.

In the June policy, the central bank retains its FY26 GDP growth forecast at 6.5 percent; with Q1 at 6.5 per cent, Q2 at 6.7 per cent, Q3 at 6.6 per cent, and Q4 at 6.3 per cent.