‘The US reciprocal tariff has added another element of uncertainty and the central bank may prefer to wait and get further clarity.’
IMAGE: Reserve Bank of India Governor Sanjay Malhotra. Photograph: Francis Mascarenhas
The Reserve Bank of India’s Monetary Policy Committee (MPC) is not expected to reduce the repo rate from the current 5.5% while it may marginally adjust the inflation forecast, said top economists.
They also said the 25% reciprocal tariff by the US government may not force the MPC to change the repo rate.
“As of today India’s gross domestic product growth seems well on the path of 6.5%. The exact impact of tariff on growth and inflation is one of conjecture and the MPC is unlikely to change any view on rates or stance,” Madan Sabnavis, Chief Economist, Bank of Baroda said.
In the last policy RBI Governor Sanjay Malhotra did mention about the limits for monetary policy driving growth when the front loading was done on rates and the cash reserve ratio (CRR), Sabnavis said.
“Therefore while there may be an emotional reaction to the tariff announcement, it must be remembered that the rate is not different from what was announced in May (26%) and hence does not warrant a different response from MPC,” Sabnavis remarked.
On her part Rajani Sinha, Chief Economist, CARE Ratings discounting any rate cut possibility said: “The US reciprocal tariff has added another element of uncertainty and the central bank may prefer to wait and get further clarity on that.”
CARE Ratings has maintained India’s GDP growth projection at 6.4% in FY26 as the recently announced reciprocal tariff could dent GDP by only 0.3% to 0.4%.
India’s economic growth momentum will be supported by recent interest rate cuts, strong agricultural activity boosting rural demand, benign inflationary conditions, and a favourable monsoon. However, it will be important to monitor risks from global trade policy uncertainties closely, CARE Ratings said in its report.
“RBI has already front loaded rate cuts factoring in a moderation in inflation. Moreover, RBI will be looking at the likely future trajectory of inflation. With the low base of 2025, consumer price index (CPI) inflation is estimated to rise above 4% in 2026,” Sinha said.
According to Sinha, the MPC is likely to revise lower the inflation projection for FY26.
“We lowered it to 3.1%,” Sinha said.
“Overall inflationary environment is likely to remain favourable over the next few quarters. However, inflation is likely to inch up above the 4% mark in the fourth quarter of this fiscal year as the favourable base effect wanes.
‘CPI inflation is likely to undershoot the RBI’s FY26 projection of 3.7%. Accordingly, the RBI may revise its inflation forecast downward. We expect CPI inflation to average around 3.1% in FY26. Given the low base of FY26, we expect average CPI inflation to be higher, around 4.5% in FY27,’ CARE Ratings report said.
Concurring with Sinha, Sabnavis said there could however be some marginal downward adjustment in the inflation forecast by 0.1% to 0.2% on account of the trends witnessed in food prices.
“But core inflation is still high and unlikely to correct anytime soon,” Sabnavis said.
At its June meeting, the MPC had cut the repo rate by 50 basis points to 5.5% and 100 bps in the CRR.
However the decision was not unanimous as Saugata Bhattacharya voted for a 25 bps cut in repo rate while other MPC members Dr Nagesh Kumar, Professor Ram Singh, Dr Rajiv Ranjan, Dr Poonam Gupta and Governor Malhotra voted in favour of 50 bps cut.
Repo rate is the rate at which the RBI lends to the banks.
The three day MPC meeting that began on Monday, August 4, 2025, will conclude on Wednesday, August 6, and RBI Governor Malhotra will announce the decision.
Venkatachari Jagannathan can be reached at [email protected]
Feature Presentation: Aslam Hunani/Rediff
