RBI may cut interest rates later, but... Here is what economists say

The Reserve Bank of India’s monetary policy committee, having slashed its benchmark repo rate by 100 basis points (1 per cent) from 6.50 per cent to 5.50 per cent since February 2025, decided to pause on Wednesday. Not only did it keep the policy rate at which it lends money to commercial banks on hold, but it also maintained its neutral stance.

Following the previous rate cuts, in the credit market, the weighted average lending rate of scheduled commercial banks has declined by 71 bps for fresh rupee loans and 39 bps for outstanding rupee loans from February 2025 to June 2025, according to RBI data.

One now wonders if Wednesday’s decision to hold interest rates is the beginning of a long pause, or is it just a temporary wait-and-watch approach to see how the current uncertainty driven by the US administration’s announcement of a 25 per cent import tariff on India unfolds, before deciding the next course of action.

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Many economists had expected that the MPC would pause this time around. The belief still is that there will be at least one more rate cut in the second half of the current financial year.

Three things will play a part here. One is how the inflation pans out. CPI (consumer price index) has turned benign, and the RBI has cut its full-year (2025-26) forecast sharply to 3.1 per cent from 3.7 per cent. However, inflation is expected to move above the RBI’s 4 per cent target from the January-March quarter of 2026, driven by low-base effects and a pickup in consumption.

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The second factor is growth. The RBI has so far maintained its GDP growth forecast at 6.5 per cent, but in the wake of the tariffs announced by the US, there are downside risks. In the post-policy conference, Governor Sanjay Malhotra stressed the current uncertainty several times.

The third factor to watch is how the transmission of the previous rate cuts pans out. Given that a large number of floating-rate home loans today are linked to external benchmarks like the repo, the interest rate transmission is fairly immediate. The 100 bps cash reserve ratio (CRR) cut, announced in the previous policy, coming into effect from September in a staggered manner, should ensure ample liquidity in the system, providing space for banks to lower interest rates.

“The transmission of the repo rate cuts would continue, lifting consumption demand, particularly in the urban areas. Rural consumption will be buoyed by another spell of adequate monsoon and, consequently, higher agricultural incomes. But, overall economic growth faces challenges from global uncertainties, particularly the downside to trade from higher US tariffs,” said Dipti Deshpande, principal economist at Crisil.

She is expecting one more rate cut this financial year, given a benign inflation outlook and growth uncertainty.

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Pranjul Bhandari, the chief economist for India and Indonesia at HSBC, expects a 25 bps rate cut in the October-December quarter of 2025.

“While the RBI marked down current year inflation, our sense is that it does not have the same certainty on growth yet, and therefore left it unchanged at 6.50 per cent. It mentioned the uncertainty around US tariffs on India, and it also mentioned that some of the data in May and June have been more mixed than strong. That suggests to us that the RBI is waiting for more data on growth to trickle in. We think that if subsequent growth data comes out weaker, the RBI could well lower its FY26 growth forecast and deliver a cut,” said Bhandari.

Sakshi Gupta, the principal economist at HDFC Bank, also believes that space for another 25-50 bps rate cut remains in place, although only if there is a significant downside risk to growth. Her base case scenario projects full-year GDP at 6.3 per cent. However, there is a 20-25 bps downside risk to that forecast if the tariffs imposed by the US remain elevated or are raised further.

Suvodeep Rakshit, the chief economist at Kotak Institutional Equities, said that the RBI will keep liquidity in surplus to ensure the continued transmission of the previous rate cuts. But, rates will be on a “long pause” as the MPC starts focusing on the inflation trajectory for 2026-27.

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“The bar for a dovish shift will be higher from here on, dependent on substantial downside to growth prospects,” he opined.

Santanu Sengupta, the chief India economist at Goldman Sachs, sees Wednesday’s policy outcome as somewhat “hawkish hold.”

“We continue to forecast a 25 bps further rate cut in Q4 from the RBI, which we added following President Donald Trump’s imposition of 25 per cent reciprocal tariff on India, which in our view would weigh on India’s growth outlook,” said Sengupta.

However, if there is a rapid and mutually beneficial resolution of US-India trade negotiations, or if there is a quicker-than-expected rise in core inflation, the RBI will leave interest rates unchanged and rely on liquidity infusion to aid monetary transmission, he added.

All in all, borrowers can still expect interest rates to be lower further given that the transmission of previous repo rate cuts will continue in the coming months on top of the possibility of additional repo rate cuts itself.

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