With festive winds and tariff headwinds, RBI MPC's policy call may set the tone for India's second-half story
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The Reserve Bank of India's Monetary Policy Committee (MPC), led by Governor Sanjay Malhotra, began its three-day review on Monday to decide the next bi-monthly policy action. With the decision due Wednesday, a status quo on the repo rate looks likely, despite low inflation, a stable rupee, and calls for a final rate cut to support growth.The US government's decision to impose a 25% tariff on Indian imports from August 7 has added a layer of uncertainty to the central bank's calculus.Since February, the central bank has cut the benchmark repo rate by 100 basis points in three steps, bringing it to 5.5%. Wednesday's meeting takes place as retail inflation has cooled significantly, well below the 4% target, while global trade tensions and capital flow concerns have resurfaced due to US tariffs. Market participants, policymakers, and businesses are now focused on the RBI's tone, not just the rate.A majority of economists expect the central bank to maintain its current policy stance. However, a growing segment sees room for a final 25 basis point cut to maintain credit momentum, especially in light of evolving downside risks to growth and soft consumer prices.Madan Sabnavis, Chief Economist at Bank of Baroda, said that recent inflation or tariff announcements are unlikely to shift the RBI's stance. 'The policy already would have buffered in the 26 per cent tariff, which was the deferred rate in April. Therefore, the tariff per se may not really change the view on growth,' he said.He expects RBI to revise its full-year inflation projection slightly downward to 3.5–3.6%, but anticipates no policy change in August.ICRA Chief Economist Aditi Nayar highlighted that inflation had cooled to just 2.1% in June. 'Further, the tariffs imposed by the US will pose a downside risk to GDP growth, while admittedly injecting volatility into the INR,' she said. 'In our view, the balance remains slightly tilted towards a final rate cut of 25 bps in the August 2025 policy review.'Mandar Pitale, Head of Financial Markets at SBM Bank India, noted that even if the US moderates its tariff plan, the impact will remain. 'Even in case of an eventual deal, US tariffs that will finally get imposed on India are likely to be closer to the tariffs offered to other emerging market Asian countries (15-25 per cent range) and will add to downside risk to growth,' he said.The upcoming festive quarter is expected to play a key role in how demand shapes up. Retail, MSMEs, and real estate stakeholders believe that another rate cut, even if modest, could improve sentiment and credit offtake.Rohit Arora, CEO & Co-Founder, Biz2X and Biz2Credit, said, 'These tariffs not only present uncertainty into external trade but also risk squeezing smaller exporters who are already grappling with tightening domestic liquidity. With the festive season approaching, a 25-basis-point rate cut could help MSMEs absorb external shocks, maintain credit access, and power job-creation.'Jash Panchamia, Executive Director, Jaypee Infratech, said, 'With inflation currently at a six-year low, a 25-basis-point cut in the repo rate would be encouraging for the overall economy. The real estate sector, having already benefited from the previous three consecutive rate cuts, would see a further boost in demand and buyer confidence if another cut is announced.'Raoul Kapoor, Co-CEO, Andromeda Sales and Distribution, added, 'With inflation remaining below expectations, geopolitical tensions easing, and the domestic economy showing signs of resilience, a moderate 25 basis point cut remains a strong possibility.'The festival season, which begins from late August and peaks in October-November, typically drives spending across sectors including housing, consumer goods, travel, and electronics. Policymakers will be watching whether the credit growth picks up in this period, which could inform their policy path for the second half.A Bloomberg report stated that Soumya Kanti Ghosh of SBI and Dhiraj Nim of ANZ now expect a 25 bps cut, reversing their earlier prediction. 'There's no point in holding off on rate cuts now,' said Ghosh, arguing that inflation is likely to remain below the RBI's 4% target through FY26. He added that a front-loaded cut could help pre-festive season consumption.However, not all agree. Aastha Gudwani of Barclays said, 'The RBI would choose to wait this policy out and let these events unfold, thereby keeping the powder dry.'According to an ET poll, 12 of 16 economists expect the repo rate to be held steady. Four expect a 25 bps cut, citing inflation's drop and supportive macroeconomic conditions. Anand Rathi Research noted, 'With inflation well contained but underlying risks still bubbling, the RBI is expected to hold the repo rate steady at 5.50%.'Suresh Darak, Founder, Bondbazaar, said, 'RBI has already frontloaded all the rate cuts to boost economic growth. Now we believe RBI will await the impact of its actions on GDP growth and inflation, before considering any movement in rates.'On the liquidity front, traders are expecting guidance following the recent CRR cut that created short-term rate volatility. With a system surplus of Rs 3.3 lakh crore and another Rs 2.5 lakh crore likely to be added from September, the RBI's commentary on liquidity absorption will be key.Governor Malhotra will announce the decision on Wednesday morning at 10am. The Governor's address will be streamed live on RBI's Youtube channel. The live address can also be seen at The Economictimes.com Markets, businesses and households alike will be listening for not just the rate, but the central bank's forward guidance, whether it confirms a long pause or leaves the door open for one final cut in 2025.
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