RBI's next interest rate cut action likely in December

The Reserve Bank of India (RBI) is expected to hold interest rates in August but possibly make yet another reduction later this year, following its greater-than-expected cut on Friday aimed at bolstering growth.

A poll by ET showed that eight out of 10 institutions expect a rate cut either in October or December while two do not expect any reduction until December. All participants expect a pause in August. Nomura is the only participant anticipating a25 bps rate cut in the October and December policy reviews. The next meeting of the RBI Monetary Policy Committee (MPC) is scheduled for August 4-6. A basis point is 0.01 percentage point.

The RBI announced a 50 bps reduction in the key repo rate to 5.50% — against expectations of a 25 bps cut — and shifted its stance to “neutral” from “accommodative”.


Limited Room for Policy Easing
Since then, economists and market participants have been debating the extent of further rate cuts that the central bank may take and by when, given governor Sanjay Malhotra’s statement that monetary policy was left with limited space to support growth after having reduced the repo rate by 100 bps since February. He added that the future course of action by the MPC will be data dependent.

Still, other factors could come into play later in the year. “The combination of a 50 bps repo rate cut and a shift in stance to neutral is a signal that the space for policy easing has been largely exhausted,” Nomura said. “However, the policy outlook depends on the macro outlook. Beyond an August pause, we expect the easing cycle to continue and still see 5.00% as the terminal rate.”

Possible uncertainties include the June-September monsoon, US tariffs and their impact on growth and the potential for inflation to come in below projections. Despite challenges, there’s room for further reduction in the RBI’s repo rate, most participants said. The monsoon made landfall earlier than scheduled and while the weather office has said it will be above normal, there’s been a lull in rain in some parts of the country since then. Other areas have been hit by severe flooding.

Cash Reserve Ratio
The RBI will also lower the cash reserve ratio by 50 bps to 3% in phases, starting September, to infuse Rs 2.5 lakh crore liquidity in the system. Both measures — the extent of the rate cut and the CRR reduction — caught the markets off guard. “Everything that had been forecast for this calendar year happened in one policy,” a bond trader said, reflecting the market’s mood after the June 6 monetary policy announcement.

Following the governor’s statement on the limited space to support growth, some economists said the RBI is not just responding to short-term data, but is also aiming to help the Indian economy grow at its full potential. Malhotra has said that the aspiration is to grow at 8%, more than 6.5% projected by the central bank for FY26.