The Monetary Policy Committee (MPC) decided to keep its policy rate unchanged on Wednesday but kept the door open for further rate cuts in the near future as it assesses the impact of domestic tax cuts and punitive US tariffs.
Reserve Bank of India (RBI) Governor Sanjay Malhotra said the current macroeconomic conditions and the outlook have opened up policy space for further supporting growth, after the six-member MPC voted unanimously to hold the repo rate at 5.50% and retained a “neutral” policy stance, though two members – Nagesh Kumar and Ram Singh – were of the view that the stance be changed from neutral to accommodative.
Why the MPC paused: A calculated wait-and-watch
The impact of the front-loaded monetary policy actions and the recent fiscal measures is still playing out, Malhotra said. “The trade related uncertainties are also unfolding. The MPC, therefore, considered it prudent to wait for the impact of policy actions to play out and greater clarity to emerge before charting the next course of action.”
The good news: The inflation target has been further pruned from 3.1% to 2.6% in FY26 while the growth target has been revised upwards to 6.8%. While the implementation of the Goods and Services Tax 2.0 guidelines is expected to offset some of the impact of the US government’s tariffs, the growth outlook for Q3 and Q4 has been pruned to 6.4% and 6.2%, respectively.
The stock market reacted positively to the RBI’s action plan, with the Sensex rising 715 points to close at 80,983 points, largely led by banking stocks. The rupee rose 10 paise to close at 88.69/$ while bond yields slipped as much as 6 basis points to 6.52%.
Analysts project future easing on growth and inflation outlook
“While prima facie the unanimous `hold’ may appear hawkish, we believe today’s policy guidance from the governor has opened the door for more rate cuts, and if RBI’s projections for growth and inflation hold, then rate cuts might be unavoidable for the RBI,” wrote Rahul Bajoria, India & Asean Economist, Bofa Securities. He projects two more 25 bps cuts in FY26 – in December and February –, taking the terminal rate to 5%, especially if the trade deal is not achieved by then.
Pranjul Bhandari, Chief India Economist, HSBC Global Research added, “We believe that if the 50% tariff sticks until year-end, the RBI will cut rates by 25bp in December, taking the repo rate to 5.25%.”
Sakshi Gupta, principal economist, HDFC Bank, said, “Given the comfortable inflation trajectory, the governor has acknowledged that the RBI has space to cut rates further.”
However, she believes that the RBI will resort to a rate cut only if the growth momentum moderates significantly and tariff risks to growth become more prominent (50% tariffs continue to exist).