Monetary Policy: RBI May Pause Rate Cuts This Month

US tariffs and penalties on India's exports led to debate on RBI's monetary easing

- UPASANA CHACHRA

The inflation trajectory in 2025 has evolved rapidly. Consumer prices are falling faster than expected, wholesale prices are in mild deflation, and food prices—once a source of macroeconomic volatility—have turned sharply benign. On the other hand, recent high-frequency growth data has been mixed, with some indicators showing a sequential pick-up in economic activity while others remain subdued.

The recent US announcement to impose a 25% tariff plus penalties on India's exports has added another layer of uncertainty to the economic outlook. This has reignited debate around further monetary easing by the Reserve Bank of India (RBI). But despite the favourable inflation data and mixed growth trend, the central bank may opt to wait before acting again this Wednesday.

Headline Consumer Price Index (CPI)-based inflation fell to 2.1% year-on-year (y-o-y) in June, lowest since early 2019. For the first half of 2025, CPI averaged 3.2%, well below the RBI's 4% aim.

Food inflation has been the key driver of this disinflation. In June, food prices contracted by 1.1% y-o-y, led by a 19% drop in vegetable prices, and falling costs in pulses and protein-rich items, while prices of cereals moderated.

This trend reflects not just a favourable base effect but also strong domestic supply conditions, aided by a robust harvest season and an early, above-normal monsoon.