MUMBAI: Mint Road observers are divided over the outcome from the three-day monetary policy committee (MPC) meeting beginning Monday, with some expecting the rate-setting panel to deliver yet another surprise rate cut on Wednesday, while others expect the status quo to continue.
More economists are expecting the status quo wherein the Reserve Bank led MPC leaving the rates unchanged at 5.50, while two led by SBI’s chief economist Soumya Kanti Ghosh and an economist at the Japanese brokerage Nomura expecting a 25 bps repo cut given radically altered external conditions with a flat 50% tariffs on Indian exports to US along with the H1 visa fee hike and the 100% tariffs on branded drug exports to the world’s largest market.
Since February, Governor Sanjay Malhotra has delivered 00 bps rate reduction through three rate cuts, with the 50 bps cut in June being the most aggressive and unconventional.
According to SBI Research, there is more than enough merit and rationale for the RBI to reduce the key benchmark lending rate by 25 bps in the forthcoming monetary policy review, citing the steeply fallen retail inflation that’s expected to remain benign even in the next financial year and the hardening of the bond yields since the June rate cut.
"There is merit and rationale in going for a rate cut on Wednesday. This will but require calibrated communication by the RBI as post-June, the bar for rate cut is indeed higher," SBI chief economist Soumya Kanti Ghosh said in a note.
"A rate cut in September is the best possible option for the RBI, which also projects it as a forward-looking central bank,” he said, adding “but there is no point in committing a type 2 error again (no rate cut with neutral stance) by not cutting rates in September as inflation will continue to remain benign even in FY27, and without a GST cut, it’s tracking below 2% in September and October, when it is likely to be printing in at 1.1%."
In fact Japanese brokerage Nomura is more aggressive in its expectations, saying it sees two cuts more by December.
Voting for a 25 bps cut on Wednesday, Nathan Sribalasundaram of Nomura said, “they still maintain their earlier forecast of two further cuts, at each of the October and December meetings.”
But Radhika Rao, executive director and senior economist at DBS Bank, sees the RBI voting for status quo.“Against the backdrop of firm growth of over 7.8%, the fiscal levers being tapped to boost demand, inflation heading up gradually and the rupee under pressure, we expect the repo rate to be left unchanged this month,” Rao said, adding there is however a 30% chance of a rate cut.
“However, cognizant of fresh tariff salvos from the US and risks to growth, we assign a 30% probability for a cut, if the RBI sees reason in frontloading action. Though we are of the view that dovish talk will achieve the desired outcome,” she said.
Forward looking policy guidance will be important, after bond yields rose sharply following the August meeting, where the neutral stance and lack of clarity on further rate cuts hurt sentiment. We expect the MPC to highlight that they have room and willingness to act, if required, effectively wait till December to gauge the impact of tariffs before easing further,” Rao said further.
She also said there is scope for 20-30 bps increase in the official FY26 growth forecast and a downward revision of a similar magnitude to inflation.
Similarly, Rajani Sinha, the chief economist at Care Ratings also sees no cut this time despite noting the rising external uncertainties and mounting headwinds to growth, even as domestic policy support is being extended to bolster consumption.
“With the RBI having already frontloaded rate cuts and ensured ample liquidity, the MPC may prefer to pause at this stage and assess how the macroeconomic landscape evolves,” Sinha said.
She also noted that while the transmission of past cuts has picked up, it will take time to filter through to the broader economy, previous rate cuts and policy reforms, such as GST rate cuts, could somewhat cushion the shocks from tariff disruptions, provided a trade deal with the US is reached soon.
“A tactical pause in the October meeting would also preserve policy space should tariff disruptions prolong and downside risks to growth materialise at the macro level. Additionally, CPI is expected to edge closer to 4% in Q4 and average around 4.5% in FY27.“
At the current repo rate, this would place the real policy rate in the 1–1.5% range. Hence, a rate cut in the upcoming meeting looks unlikely,” Sinha said, adding, however, “that said, if growth risks intensify materially due to the prolongation of tariff-related disruptions, the RBI may consider cutting the rate in the December policy.
Recent rate cuts by the US Federal Reserve should further comfort the RBI on the policy front to undertake rate cuts later if required.
”Aditi Nayar, the chief economist at Icra Ratings also feels there is not room for rate cut this time, says the MPC is anticipated to maintain the status quo on the repo rate this time.
“This view is supported by the positive impact of GST reforms on demand, stronger-than-expected Q1 growth, and an inflation trajectory that, while lowered due to GST rate cuts, is expected to slope upwards thereafter,” Nayar said.