The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) concluded its August meeting with a predictable yet pivotal decision—holding the policy repo rate at 5.50 percent and maintaining a neutral stance. The unanimous vote by committee members reflects caution amid softening inflation and geopolitical ambiguity, particularly around trade relations with the US.
Governor Sanjay Malhotra framed the move as strategic, referencing the “front-loaded” rate cut in June. With monetary transmission still under way, the RBI appears keen on assessing its impact before taking further steps. The decision signals that while inflation seems under control, the central bank is not ready to loosen its guard.
On the growth front, the RBI has retained its GDP projection for 2025-26 at 6.5 percent. This outlook is underpinned by robust agricultural performance, buoyant rural demand and resilience in services. India's services Purchasing Managers' Index (PMI) surged to 60.5 in July—an 11-month high—while manufacturing PMI hit a 16-month peak at 59.1. However, the Index of Industrial Production softened to 1.5 percent in June, weighed down by weakness in mining and power generation.
The rainfall level this monsoon is proving supportive, enhancing kharif sowing and boosting reservoir levels to 69 percent of full capacity—an improvement over last year. These agricultural tailwinds are expected to further sustain rural momentum.
Yet, risks persist. Uncertainty around trade tariffs by the US, particularly those levied under President Donald Trump’s earlier tariff policy, could impede export growth. Reflecting this cautious optimism, the RBI’s quarterly GDP projections show mild moderation across 2025-26: 6.5 percent for Q1, 6.7 percent for Q2, 6.6 percent for Q3, 6.3 percent for Q4 and 6.6 percent for Q1FY27.
Inflation projections have seen a notable downward revision. Headline inflation for FY26 has been pegged at 3.10 percent, down from 3.70 percent in the previous policy. June’s inflation sharp drop to 2.10 percent was largely due to favourable base effects, improved agricultural output and cooling food prices. Preliminary July data indicates that this trend may continue. Nevertheless, core inflation remains sticky above 4 percent, fuelled by rising commodity prices, particularly of gold.
For Q4FY26 and Q1FY27, the inflation projections stand at 4.40 percent and 4.90 percent, respectively, suggesting the RBI will stay vigilant.
Liquidity management remains a priority. The central bank has prepared a draft revised liquidity framework for public consultation. The internal working group has recommended retaining the weighted average overnight call rate as the operating target. Tools like variable rate repo (VRR) and variable rate reverse repo (VRRR) will continue to be employed to maintain call rates near the repo rate. Notably, daily liquidity absorption averaged Rs 2.17 lakh crore across June and July. The cash reserve ratio (CRR) cut set to take effect in September should further ease conditions.
Globally, economic momentum remains subdued, with inflation concerns in developed economies still lingering. The US Federal Reserve held its policy rate steady at 4.25–4.50 percent in July. However, soft employment numbers and downward revisions for prior months have dramatically raised expectations for a rate cut in the September meeting of the Federal Open Market Committee.
Given the backdrop, the commentary by the RBI governor was neutral to hawkish. With the projected inflation for Q4FY26 and Q1FY27 above 4 percent, and considering that the central bank has maintained the growth forecast compared to the last policy, it seems that the bar for a future rate cut is high unless growth weakens.
Malhotra also mentioned during the post-policy press conference that the rate cut ahead will be data-dependent, likening it to a cricket test match where choosing to bat or bowl first hinges on the pitch and weather conditions. After the policy, the benchmark 10-year government security yield hardened by 5-7 basis points (bps) and the term spread between repo rate and 10 years G-sec rose to around 90 bps. I expect the 10 years G-sec to trade in the range of 6.25-6.45 percent over the next two months.
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