Rate Cut? Status Quo Likely Despite Dip in Inflation

RBI set to lower inflation projection, but GDP growth estimate and policy stance may remain unchanged

- Tamal Bandyopadhyay

Indian central bank's rate-setting body, the Monetary Policy Committee (MPC), will hold its third bi-monthly meeting of the current financial year between August 4 and 6. There's consensus among economists and market watchers on two critical aspects of the August monetary policy.

One, the Reserve Bank of India (RBI) will pare its inflation estimate for the year, and two, the growth estimate will remain unchanged.

In the June policy, the RBI had projected the consumer price index (CPI)-based inflation rate for financial year 2025-26 (FY26) at 3.7 per cent, lowering its April projection of 4 per cent.

CPI inflation dropped to its 77-month low of 2.1 per cent in June. In July, it is set to dip further, below 2 per cent. Inflation has been undershooting the RBI estimate through the current financial year. The 2.1 per cent inflation in June makes the average April-June quarter inflation 2.69 per cent, below the RBI estimate of 2.9 per cent.

The RBI's inflation estimate for FY26 is 3.7 per cent (2.9 per cent for the first quarter; 3.4 for the second; 3.9 for the third; and 4.4 per cent for the fourth quarter). Till December, retail inflation is likely to undershoot the RBI estimate; the average inflation for FY26 could be around 3.4 per cent.

In its June policy, the RBI did not change its projection for gross domestic product (GDP) growth for the year. It remained at 6.5 per cent, with risks evenly balanced. In its February policy, the RBI had projected 6.7 per cent GDP growth for FY26 but trimmed it to 6.5 per cent in April and stuck to that in June. This is in sync with the estimates of Moody's Ratings and S&P Global Ratings.