RBI to Hold in August as Policy Cycle Enters Pause Phase

The Reserve Bank of India (RBI) is expected to keep the policy rate unchanged at 5.50% in its upcoming August 6–8 Monetary Policy Committee (MPC) meeting, marking a tactical pause after delivering 100 basis points of cumulative rate cuts since February. The central bank’s shift to a neutral policy stance in June, alongside Governor Malhotra’s clear signal that future actions will be “calibrated and data-driven,” reinforces the case for holding rates steady this month.

Inflation Has Fallen—But So Has the Room for Aggression

Headline inflation has undershot expectations consistently in recent months. CPI inflation eased to 2.1% yr/yr in June, with food inflation turning negative for the first time in over five years. Disinflation has been broad-based, driven by lower prices of vegetables, pulses, milk, and cereals, supported by a robust monsoon and rising agricultural output. Q1 inflation averaged just 2.7%, below the RBI’s 2.9% estimate, and well beneath its 3.7% FY26 target.

However, while the headline narrative is comforting, underlying pressures remain. Core inflation has edged up, led by stickiness in education, healthcare, and transport costs. Moreover, the RBI’s inflation projections show CPI rising through the fiscal year—from 3.4% in Q2 to 4.4% in Q4—highlighting that the current low may be cyclical, not structural. This alone justifies a cautious policy approach.

Growth Is Strong—And Still Building Momentum

India’s macro fundamentals remain solid. FY25 GDP growth hit 6.5%, with the March quarter printing an impressive 7.4%. Construction, public services, and investment led the upturn, while agriculture is poised for another strong year amid early and widespread monsoon coverage. GST collections at INR 1.74tn in June and robust tax revenues also suggest that private consumption and formal sector activity remain healthy.

While industrial production slowed to 1.5% yr/yr in June, this moderation is a reflection of base effects and sectoral divergence along side emerging signs of slowing activity. However, income tax relief in the FY26 Budget will gradually filter into household spending, sustaining domestic demand through the second half of the year.

Liquidity Is Flush, External Metrics Are Comfortable

With the Cash Reserve Ratio (CRR) cut by 100bps and liquidity injections of INR 9.5tn since January, system liquidity has moved decisively into surplus. FX reserves remain strong at nearly USD 700bn, while the current account swung into a USD 13.5bn surplus in Q4 FY25. These conditions give the RBI operational flexibility, but they also reduce the urgency for further cuts.

That said, the INR has come under renewed pressure, with the currency hovering around 87.2 per USD. Rising imports and a widening trade deficit (USD 23bn in June) are partly to blame, but so too are mounting global trade tensions, especially involving the US and China. In such a landscape, premature easing could fuel capital volatility or weaken India’s external buffers unnecessarily.

Why the RBI Will Pause—And When It Might Resume

Having already front-loaded rate cuts in response to sharp disinflation and solid growth, the RBI now has the luxury to wait. Cutting further in August would risk overstimulating an economy that is already expanding above trend and reduce the buffer against potential global shocks. The real policy rate is now broadly neutral, inflation is rising back toward target, and growth remains self-sustaining—arguing against further accommodation in the near term.

We expect the RBI to stay on hold through Q3, using this time to assess the lagged impact of earlier rate reductions. A fresh cut is more likely in late 2025, contingent on inflation remaining subdued and growth showing signs of deceleration.