RBI Holds Rates Steady Amid Growth Concerns and Inflation Outlook

India’s central bank, the Reserve Bank of India (RBI), has opted to maintain the benchmark repo rate at 5.50% in its August 2025 monetary policy review, signaling a cautious pause after three consecutive rate cuts earlier this year. Governor Sanjay Malhotra’s address emphasized the resilience of the Indian economy while acknowledging lingering global trade challenges and inflationary risks.

 

Key Highlights from RBI’s August 2025 Policy Statement

Repo Rate Held at 5.50%: The RBI maintained the policy rate, citing the need to assess the impact of earlier frontloaded cuts totaling 100 basis points since February.

 

Policy Stance Remains ‘Neutral’: The central bank retained its neutral stance with a dovish tilt, indicating flexibility in future decisions depending on macroeconomic data.

 

Inflation Trends:

 

Headline inflation eased to 2.1% in June, driven by deflation in food categories like vegetables and pulses.

 

Core inflation remained steady at 4.4%, though excluding precious metals, it stood at a more moderate 3.5%.

 

CPI inflation for FY26 is projected to average around 3.1%, but is expected to rise above 4% in Q4 due to base effect reversal.

 

Growth Outlook:

 

FY26 GDP forecast retained at 6.5%.

 

Risks to growth persist due to US-imposed 25% tariffs on Indian exports and weak urban consumption.

 

Manufacturing and mining sectors showed signs of contraction in Q1 FY26.

 

Market Reaction

Nifty 50 Index: Declined by 0.2% post-announcement, reflecting investor caution amid muted growth signals and no immediate rate cut.

 

Banking Sector: Public sector banks have actively transmitted past rate cuts, reducing lending rates more swiftly than private peers.

 

Global and Domestic Influences

Geopolitical Landscape: While geopolitical uncertainties have somewhat abated, trade tensions—especially with the US—continue to cloud export prospects.

 

Liquidity Conditions:

 

Surplus liquidity in the banking system remains high, supported by CRR cuts and a record ₹2.7 trillion dividend transfer to the government.

 

RBI may revise its liquidity framework in upcoming meetings.

 

Forward Guidance

RBI Governor Malhotra emphasized a data-dependent approach, noting that while inflation is currently subdued, volatility in food prices and global commodity trends could reintroduce upward pressure.

 

Analysts expect the next rate cut, if any, to occur in October, contingent on festive demand, agricultural output, and trade clarity.

 

Governor’s Commentary

Governor Malhotra stated that India’s medium-term economic prospects remain bright, supported by private consumption, rural demand, and capital formation. However, he cautioned that the inflation battle is not over and reiterated the RBI’s commitment to price stability and growth support.

 

Source: Moneycontrol, Indian Express, Business Standard, The Hindu BusinessLine.