OPINION Opinion | RBI unlikely to go dovish unless growth is challenged, inflation outlook rules out further easing

RBI Policy Decision Analysis

The August monetary policy announcement was pretty much a continuation of the June MPC decision, with no change in either rates or stance.

Some sections of the fixed income markets had recently started believing that the RBI MPC might come up with a surprise rate cut, given the recent developments around the threat of tariffs by the US. The policy decision and MPC’s outlook, however, sets the record straight - status quo in rates (repo rate at 5.50 percent) and policy stance (Neutral), and the bar being set high for any further monetary easing.

The MPC, at the current juncture, does not appear too concerned about the impact of US tariffs on the growth prospects of the Indian economy, although the RBI Governor did emphasize that the evolving trade situation could pose a downside risk to growth. The MPC has actually retained all its earlier projections of real GDP growth, with no changes in FY26 forecast of 6.5 percent per annum, and quarter-wise projections of 6.3-6.7 percent per annum. In fact, contrary to market expectations, the MPC has actually projected a higher growth of 6.6 percent per annum in Q1FY27, which suggests the RBI is viewing the economy on strong and steady wheels.

CPI inflation projections, as expected, based on the evolving prints, have been further lowered from the previous policy. CPI for Q2FY26 has been projected as low as 2.1 percent, while the subsequent quarter-wise projections are seen increasing sequentially during FY26 to 4.4 percent in Q4FY26. A noticeable data point is that the CPI projection for Q1FY27 has been raised very close to 5 percent.

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On the liquidity front, the RBI remains supportive by keeping sufficient ongoing system liquidity. Liquidity has been abundantly surplus in the recent weeks, and the ensuing implementation of the already-announced CRR cut will further support liquidity conditions. The RBI is committed to staying nimble and flexible in ensuring sufficient liquidity and also smooth transmission of the rate cuts into the money markets and credit markets.

The August MPC decision further reinforces our view that the current rate cycle ended or reached near its end in June, and we should now expect a longish pause with the RBI monitoring the growth-inflation dynamic, and liquidity no longer being a primary driver of policy decision. Although near-term inflation forecasts have been lowered, the terminal CPI projection (Q1FY27) having been raised close to 5 percent levels, along with the unchanged growth projections, virtually rules out any further monetary easing by the MPC.

Lower CPI inflation is no longer a sufficient criterion for easing, and from the RBI Governor’s speech, it appears that core inflation will be a monitorable going ahead. If and only if the MPC perceives serious challenges to India’s GDP growth trajectory (owing to direct / second-round effects of US tariffs) would there arise a possibility of going dovish - which is clearly not the MPC’s base case currently, given that all members of the MPC voted unanimously for status quo, both with respect to the policy rates and the policy stance.

Fixed income markets are likely to adjust their yield expectations accordingly.

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