RBI's Upcoming Decision on Interest Rates: What to Expect on August 6
Retail Inflation Data and RBI's Dilemma
Although the inflation data for July has yet to be released, the Reserve Bank of India's Monetary Policy Committee (MPC) is currently analyzing the figures from June. In June, retail inflation dropped to its lowest level in nearly 77 months, raising the critical question of whether to cut interest rates.
The pressing issue is how much to reduce the rates. The RBI had previously lowered interest rates by 50 basis points in June, following two cuts of 25 basis points each in February and April.
This adjustment brought the RBI's policy interest rate down from 6.50% to 5.50%. With inflation hovering around 2%, the MPC is now deliberating on the extent of rate cuts for August. RBI Governor, who also chairs the MPC, is expected to announce the decision on August 6. A recent report from SBI suggests a potential cut of 25 basis points, while some analysts speculate a reduction of up to 50 basis points.
Expert Predictions and Market Reactions
Some experts are predicting a cumulative rate cut of 1% across the upcoming policy meetings in August, October, and December, which could mean reductions of 50, 25, and 25 basis points respectively. This would bring the repo rate down to 4.5% by the end of the year, providing significant relief to borrowers. Analysts also believe that the RBI may further lower its inflation forecasts in August.
Starting August 4, the RBI MPC has begun discussions on repo rates, inflation, and GDP. Since Sanjay Malhotra took over as RBI Governor, the MPC has focused on public interest, implementing a total rate cut of 1% from February to June.
SBI's Insights on Rate Cuts
According to SBI's research report, the RBI's MPC is likely to implement a 25 basis point cut. The report indicates that previous trends in loan growth around Diwali suggest that any rate cut before the festival could significantly boost lending. For instance, a 25 basis point cut in August 2017 led to a substantial increase in loan growth by the end of Diwali.
The report also highlights that since February 2025, the RBI has already reduced the repo rate by 100 basis points, benefiting both borrowers and banks by improving their credit books.
Predictions from Economists
A recent survey of economists indicated that following an unexpected cut in June, the RBI might maintain the repo rate at 5.50% during the August policy meeting. Approximately 75% of economists believe there will be no change in the rate this time, while others anticipate a 25 basis point cut.
The RBI adopted a neutral stance in June, suggesting that future rate cuts will depend on upcoming economic data. Ongoing trade negotiations with the United States, which recently announced a 25% tariff, also play a role in these considerations.
Could There Be a 50 Basis Point Cut?
The possibility of a 50 basis point cut in August remains a topic of speculation. Anuj Gupta, Director at Wealth Global Research, mentioned that a minimum cut of 25 basis points is expected, but the RBI could surprise the market with a larger cut.
Historically, the RBI has made aggressive cuts to manage the economy, as seen in 2020 when it reduced rates by 115 basis points in just two moves.
Future Rate Cuts: What Lies Ahead?
The significant question remains whether the RBI will implement a total cut of 1% across the next three meetings. Gupta suggests that rate cuts could occur in a 50-25-25 or 25-50-25 ratio. He noted that external supply constraints and increased domestic supply could lead to price reductions, impacting inflation positively.
The market is keenly observing whether the RBI will opt for a 0.25% or 0.50% cut, or if the predictions from the Reuters survey will hold true.