RBI MPC meeting: Will US tariffs and low inflation trigger a rate cut?

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) began its three-day meeting on August 4 against the backdrop of faltering credit growth, weakening global trade, and new headwinds from US tariffs. The decision, which will be announced on August 6, could have far-reaching implications for borrowers, banks, and financial markets. The key policy rate, or the repo rate, currently stands at 5.5 per cent after a cumulative 100 basis points (bps) cut across the last three policy meetings. While the MPC’s stance has shifted to ‘neutral,’ speculation is rife that a fresh rate cut may be on the table.

Rate pause or cut? RBI faces tough trade-off

With the US imposing 25 per cent tariffs on Indian exports, concerns have grown over a potential hit to trade and GDP. Analysts believe the RBI could respond proactively. Japanese broking Nomura sees a 35 per cent chance of a surprise rate cut in August, though it continues to expect 25 bps cuts in both October and December. Similarly, the State Bank of India (SBI) has called for a front-loaded 25 bps cut in this meeting to stimulate credit demand ahead of the festive season.

However, some, including Barclays and CareEdge Ratings, suggest the RBI may prefer a “dovish pause” to assess the impact of previous cuts. Barclays expects the final 25 bps cut to come in October, while CareEdge says the RBI may wait for further clarity on global risks and transmission of earlier rate reductions.

Inflation eases, but growth concerns mount

India's retail inflation has significantly eased, with June CPI at just 2.1 per cent, which is its lowest level since January 2019. July inflation could drop further to 1.5 per cent, well below the RBI’s target range of 2-6 per cent. Barclays now forecasts FY26 inflation at 3.5 per cent, down from the RBI’s 3.7 per cent estimate, creating more room for monetary easing.

At the same time, indicators point to economic softness. Bank credit growth to industry slowed to just 5.5 per cent in June, and overall credit-deposit ratios have declined. Net interest margins for banks have shrunk, and deposit growth continues to outpace credit growth. Public sector banks are leading in lending, but the private sector remains cautious amid tepid demand and tight margins.

Cautious optimism

Homebuyers, borrowers, and banks are keenly watching for any change. A rate cut would bring cheer to home loan seekers while also helping revive private investment. Still, with global volatility, a hawkish US Fed, and rupee pressure in play, RBI Governor Sanjay Malhotra and the MPC may tread cautiously. Regardless of the outcome, the central bank’s forward guidance will be key in signalling its growth versus inflation priorities for the rest of FY26.