Will RBI hold repo rate? 5 things to look out for in August MPC

Reserve Bank of India

The Reserve Bank of India (RBI)-led Monetary Policy Committee (MPC) is set to announce its interest rate decision on August 6, days after US President Donald Trump announced 25 percent tariffs on Indian exports. The MPC is meeting at a time when retail inflation has remained lower than RBI’s medium term target of 4 percent and support is needed for growth revival.

Earlier, bankers, economists and fund mangers who participated in a Moneycontrol’s poll had predicted a status-quo in key rates, while a majority of the participants expect the MPC to retain the policy stance as ‘neutral’ stance, and keep its tone dovish in the upcoming policy. Amidst the heightened situation since the start of this month, here are the five key things to watch out for in the RBI Policy on August 6:

Impact due to tariff action

Experts are of the view that the recent imposition of the 25 percent tariffs by the US has increased external risk for the Indian economy, which may prompt the RBI to take monetary decisions in a cautious and calibrated manner while announcing the decision of tomorrow's MPC.

This is because, the tariffs are expected to have an impact of 20-30 basis points (bps) on GDP, but economists are yet of the view the RBI may adopt a "wait and watch" approach given ongoing trade negotiations and the uncertainties thereof.

The global uncertainty has heightened after the announcement of the tariffs by the US on July 30, and, contrary to the situation which prevailed in the June policy decision, it is now complicating the policy outlook of the RBI. The move raises concerns over a potential slowdown in external demand, trade tensions, and capital flow volatility—all of which could weigh on India’s economic growth and financial stability.

However, easing inflation below the RBI’s medium-term target of 4 percent may provide some room for policy rate easing.

Any commentary from RBI in the matter of this development will be closely monitored by equities, bonds and currency markets to gauge the future moves from a regulatory standpoint.

Experts say that the central bank is likely to focus on ensuring a balance between supporting domestic growth and safeguarding against global shocks.

Will RBI revise GDP, Inflation projections?

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, although experts believe an immediate downward revision in GDP projections is unlikely.

“As economic activity remains broadly resilient, but external risks to growth persist, due to evolving tariff related developments, RBI may keep GDP forecasts unchanged for now in the upcoming policy meet. We expect GDP growth in the range of 6.4-6.6 percent in FY26,” said Jahnavi Prabhakar, Economist at Bank of Baroda.

Commentary on growth

The commentary of RBI governor will be key to watch in the August policy because of the uncertainty over the tariffs and its impact on the growth.

In the last monetary policy, RBI Governor Sanjay Malhotra had mentioned that any spillovers emanating from protracted geopolitical tensions, and global trade and weather-related uncertainties pose downside risks to growth.

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 central bank retains its FY26 GDP growth forecast at 6.5 percent in June policy; 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.

Liquidity Measures

Market participants are expecting more clarity from the RBI on the amount or level of surplus liquidity to be kept in the banking system. Further, they expect the central bank to release an updated liquidity management framework to ensure its rate decisions are effectively passed through to the broader economy. Currently, liquidity in the banking system is estimated to be in surplus of around Rs 4 lakh crore, as per RBI’s data.

The banking system liquidity, which was in deficit till April, turned in to surplus mode after the central bank started infusing durable liquidity to the banking system through open market operations (OMO) purchases and USD/INR Buy/Sell swap auctions. Along with this, they have also been supporting liquidity through daily Variable Repo Rate (VRR) auctions. All these measures helped banking system liquidity to turn surplus and remain in surplus mode.

Further, in June policy, the RBI cut Cash Reserve Ratio (CRR) to give a boost to liquidity in the banking system. This will add Rs 2.5 lakh crore liquidity to the banking system. The CRR cut is scheduled in four tranches of 25 bps each starting from the fortnight beginning September 6, followed by October 4, November 1 and November 29, 2025.

 Rate trajectory

Most economists believe that the RBI may hold interest rates steady at 5.50 percent, currently the terminal interest rate. This will allow the RBI to assess incoming data on the impact of monsoons on inflation, the impact of past rate cuts on the growth trajectory, and make changes if required in the October MPC meeting. For now, economists are penciling an 25 bps rate reduction in October policy.  That said, in June policy, SBI Research had predicted 50 bps rate cut, which turned true. Similarly, SBI Research expect 25 bps rate cut, when other experts or economists are predicting a status quo in the August policy.