RBI policy holds 5.5% repo rate; cuts inflation estimate by 60 bps

6 Aug 2025 , 02:15 PM

WHAT CHANGED SINCE JUNE 2025 MONETARY POLICY

Not much changed on the macros since June 2025 policy announcement. If anything, inflation is more benign, growth is modest and the CAD is in control. However, the big change was in US trade policy. The much awaited Indo-US trade deal did not happen after India refused to open up sensitive areas like agriculture, dairy products, and GM crops. A peeved Trump imposed 25% tariffs on India, and threatened to stretch tariff rates to 100% as punishment for India buying Russian oil and arms. For now, the Indian establishment has been unperturbed, and that even shows in monetary policy. But, if effects start to manifest on growth, then we could see an Indian response; sooner rather than later.

WHAT WAS THE SOUL OF THE AUGUST 2025 MONETARY POLICY?

The soul of the policy was more about consolidating on existing gains. The RBI chose to hold repo rates at 5.5% to let the 100 bps repo cut since February to sink in and get transmitted. Also, RBI believes that while nominal GDP may be impacted by tariffs, impact on real GDP will be minimal due to lower inflation. RBI is trying to align its monetary policy more in sync with fiscal policy, considering that the tariffs are likely to pose challenges on multiple counts. RBI MPC maintained its neutral stance, but is open to further rate cuts, if warranted. This looks like a brief pause, before the actual rate cut decision ahead of festive season.

HIGHLIGHTS OF RBI POLICY STATEMENT – AUGUST 2025

Here are some of the key takeaways from the August 2025 policy statement.

• RBI held repo rates at 5.50% to let the 100 bps rate cut fully sink in. The vote for status quo on rates was unanimous by all 6 members of the MPC.
• This holds the SDF (reverse repo) rate at 5.25%, while the bank rate and marginal standing facility (MSF) stay put at 5.75%. These are repo-linked rates.
• The 100 bps CRR cut from 4.0% to 3.0%, announced in June policy, will take effect in 4 tranches between September and November and release ₹2,50,000 crore of liquidity.
• The stance of the monetary policy, which was shifted back to Neutral in June, has been held at Neutral in August 2025. The vote was, once again, unanimous.
• RBI MPC held its GDP estimate for FY26 at 6.5%. While global risks remain, RBI expects lower inflation to keep real GDP growth intact.
• Inflation forecast for FY26 was further cut by 60 bps to 3.1%, on record low price levels. RBI has cut its FY26 inflation estimates by 170 bps since February 2025.

Unlike the last 2 RBI policies, the August policy was devoid of too much action. But it offers the much needed “Pause and Reflect” opportunity.

MPC CUTS FY26 INFLATION ESTIMATE BY 60 BPS TO 3.1%

RBI MPC aggressively cut its inflation estimates for FY26 by 60 bps to 3.1%. Since February 2025, RBI has cut its inflation estimate for FY26 by 170 bps from 4.8% to 3.1%. While core inflation continues to be elevated at 4.4%, food inflation has dipped into negative and fuel inflation is under pressure due to a supply glut from OPEC. The cut in outlook indicates that inflation is becoming more benign than expected; due to a combination of large base effect, record Kharif and Rabi output, and supply side reforms. The FY26 headline inflation is pegged at 3.1%; split quarter-wise as Q2FY26 (2.1%), Q3FY26 (3.1%), Q4FY26 (4.4%), and Q1FY27 (4.9%). RBI expects inflation to rise, once the base effect wears out.

RBI MPC HOLDS FY26 REAL GDP GROWTH AT 6.5%

Trade tariffs continue to be the single biggest risk factor for nominal growth. However, the RBI is betting on two positives. Firstly, domestic growth is resilient and a pick-up in urban demand will compensate for a slowdown in exports. Secondly, the lower inflation is likely to offset the impact on nominal growth, by keeping real GDP growth stable. MPC also expects that government may continue to support capex to boost growth. The FY26 real GDP growth is held at 6.5%; broken up quarter-wise as Q1FY26 (6.5%), Q2FY26 (6.7%), Q3FY26 (6.6%), and Q4FY26 (6.3%). RBI expects FY27 real GDP growth to improve slightly to 6.6%.

DEVELOPMENT AND REGULATORY POLICIES ANNOUNCED

Apart from the policy statement, the RBI has also announced two key policy changes to be implemented. Firstly, the RBI proposes to standardize the procedures and documents to be submitted to the bank in the event of a nominee claiming bank balances and assets of the deceased. A draft will be issued shortly. Secondly, the RBI retail debt portal to trade in gilts, will now also have an auto-bidding facility for treasury bills (T-Bills) covering investment and reinvestment options. Retail investors can mandate auto bid placement.

To sum up, the policy is reflective of a central bank on “wait and watch” mode for more clarity on the fiscal front. We could see more affirmative action in the October 2025 policy.