Rate cut could be a close call

RBI will pare CPI inflation projection again, but might not change growth estimate for now; dovish undertone likely

- TAMAL BANDYOPADHYAY

After a one-percentage-point cut in the policy repo rate in three tranches — between February and June — the Monetary Policy Committee (MPC) of India’s central bank left the rate unchanged at 5.5 per cent in August.

The “neutral” monetary policy stance also stayed put. Both decisions of the Reserve Bank of India’s (RBI's) six-member rate-setting body were unanimous.

While reducing the policy rate by half a percentage in June, the RBI had changed its stance from “accommodative” to “neutral”.

In August, the RBI also left its gross domestic product (GDP) growth estimate for 2025-26 (FY26) unchanged at 6.5 per cent, but pared its projection for the consumer price index (CPI)-based inflation rate for the year sharply — from 3,7 to 3.1 per cent. In June, it had reduced it from 4 per cent to 3.7 per cent.

Announcing the last policy, RBI Governor Sanjay Malhotra said the current macroeconomic conditions, outlook and uncertainties called for a continuation of the current policy rate and a wait for further transmission of the “frontloaded” rate cuts to the credit market and the broader economy.

‘The uncertainties surrounding the tariff tantrums have been continuing. What can we expect from the MPC on October 1?

Before we get into that, let’s look at what has changed since the last policy.

In mid-September, the US Federal Reserve cut its benchmark interest rate for the first time since December 2024, and signalled that more cuts were likely this year. Matching Wall Street’s expectations, it went for a quarter percentage point cut, putting the target range for its main lending rate at 4-4.25 per cent.

Two more quarter percentage point cuts are expected this year, but the Fed chairman has made it clear that further cuts are “not on a preset path”. This is despite the fact that “the balance of risks has shifted” towards the employment side of the Fed’s mandate instead of inflation, which was the case earlier.