RBI monetary policy: Room for more easing ahead amid geopolitical shifts

Since June, retail inflation sprang fresh downside surprises to reach six-year low of 2.1% y/y. Average CPI inflation in 2025-26 will likely undershoot the RBI's downwardly revised projection of 3.7%

During its June meeting, the monetary policy committee (MPC) surprised with an outsized 50 basis points repo rate cut, a large CRR reduction, and a pivot back to “neutral” stance from “accommodative”. After such a large and multi-pronged monetary easing, the likelihood of further rate cut soon appeared slim. However, more recent geopolitical developments and evolving growth-inflation dynamics seem to have enhanced the probability of more easing in the near future.

 

Since June, retail inflation sprang fresh downside surprises to reach a six-year low of 2.1 per cent y/y. Average CPI inflation in 2025-26 will likely undershoot the RBI’s downwardly revised projection of 3.7 per cent. Core inflation stayed well within the RBI’s comfort zone. WPI also slipped into deflation for the first time in two years. 

High frequency indicators suggest a mixed bag. While rural indicators and kharif sowing fare well amid good monsoon progress, urban consumption and industrial indicators stay modest. Bank credit also witnessed a broad-based deceleration from over 12 per cent y/y to 10 per cent in the last six months.  CATCH RBI MPC MEETING UPDATES LIVE

 

Moreover, fresh uncertainties have been triggered by the Trump administration imposing 25 per cent tariffs on Indian exports to USA, a rate higher than that imposed on a number of peers such as Indonesia (19 per cent), Philippines (20 per cent), and Vietnam (20 per cent). However, negotiations remain underway with hopes for lower tariffs. 

To speed up rate transmission, the RBI has ensured banking system liquidity staying in surplus through a string of proactive moves since early 2025. The results are visible – in the first half of 2025, the weighted average lending rate on fresh bank loans dropped 71 basis points while equivalent term deposit rates fell 87 basis points. Recently, the RBI has been conducting VRR and VRRR auctions to anchor money market rates near the repo rate, underscoring a more active liquidity management.   

In sum, one feels that the domestic growth-inflation dynamics has opened up space for another 25-50 bps of easing during 2025-26. Interestingly, in its latest monthly economic review in July, the Ministry of Finance also flagged their view of “room for the easing cycle to be sustained”. As such, the MPC decision in August stays a close call whether the committee decides to frontload rate cut (once again!) or choose to wait and watch for the dust to settle on the external front (eg., tariffs, US Fed action and yield), while continuing with proactive liquidity management to ensure transmission of monetary easing. 

Even if the committee may decide to stay on hold in August, MPC commentary will likely be a tad more dovish underscoring commitment to support rate transmission and growth. 

A repo rate cut may help exports turning more competitive, partly cushioning the impact of higher tariffs, while likely not triggering any major inflationary pressure given the current benign commodity prices. Amid renewed expectation of rate cut and money market rates hovering closer to the repo rate, one expects bond yields to exhibit a softening bias in the near term, along

with some reversal of the steepening of the yield curve witnessed since the June MPC meeting.

 

(The author is Chief Economist & Head of Research in Bandhan Bank. The author thanks Sudarshan Bhattacharjee and Gaurav Mukherjee for assistance. Views are personal.)