With new members entering the MPC and the US Federal Reserve easing rates, the RBI faces a delicate balancing act between sustaining domestic growth and curbing inflationary pressures.
Economic growth and inflation: The domestic picture
India’s economic landscape has been characterised by strong growth in recent quarters. According to the State Bank of India (SBI), domestic conditions remain paramount in shaping the RBI’s monetary policy decisions. With India’s growth potentially higher than its long-term potential output, the report argues that maintaining the current interest rate levels is justified. “Domestic conditions are paramount, and with robust growth, higher than potential output, the case for a pause exists,” the report said.
The growth rate for the first quarter of FY2025 was 6.7%, slightly below the RBI’s projection of 7%. While still indicative of strong growth, this dip has raised concerns. Moreover, key indicators such as vehicle sales, cement volumes and GST collections have seen a drop, signalling a cooling of economic activity.
These trends, coupled with a tight fiscal policy, suggest that domestic demand is weakening, casting doubt on whether India can maintain its growth momentum.
A pause on rate cuts amid inflationary concerns?
One of the key reasons the RBI is expected to refrain from cutting rates is inflation. Though inflation has softened from its peak, the RBI remains cautious about its durability. The central bank is also wary of global risks, such as rising geopolitical tensions in West Asia, which could drive up oil prices and exert pressure on domestic inflation.As per an ET (Economic Times) poll of economists, 80% of respondents expect the RBI to keep the repo rate unchanged at 6.50%, marking the tenth consecutive meeting with no rate cuts. This reflects the RBI’s cautious stance, with inflation still posing a significant risk to price stability.“In our base case, we expect two rate cuts this fiscal, with the first one in October unless risks arising from the geopolitical situation push the rate cut decision. Lower inflation this fiscal compared to the last should make way for easing monetary policy. For the fiscal, good monsoon and healthy kharif sowing should bring down food inflation, and hence the headline, compared with the past fiscal,” said CRISIL’s Principal Economist Dipti Deshpande.
However, core inflation — a measure that excludes food and energy prices — has subdued, sitting near a series-low. Some economists argue that this gives the RBI room to adopt a more accommodative stance in the coming months. According to a report from Nuvama, the central bank is expected to shift its stance from ‘withdrawal of accommodation’ to ‘neutral’ in this policy meeting, signalling potential rate cuts later this year, possibly in December.
New members to bring a change?
The upcoming meeting will be the first time the newly appointed external members of the MPC — Ram Singh, Saugata Bhattacharya, and Nagesh Kumar — participate in setting India’s monetary policy. Their views could tilt the balance of the committee, which has previously been divided on the appropriate monetary stance.
Economists are watching Bhattacharya closely. In an opinion piece he wrote in August, Bhattacharya made a strong case for cutting rates, arguing that the high real rates, adjusted for inflation, could harm growth. Barclays economists Shreya Sodhani and Amruta Ghare have noted, “We expect the MPC to keep policy rates and stance unchanged next week, with at least one dissenting vote, likely from the new external members.”
“Broadly, the new three members have a background similar to the previous members and no drastic change is expected in the policy decision-making because of the same. Although the perspective and approach of each external member may differ, the ultimate policy decision is dependent on the prevalent growth and inflation situation at a point of time and the prospects on account of both internal and external factors,” said Jyoti Prakash Gadia- Managing Director at Resurgent India.
Though it remains to be seen how Bhattacharya’s views have evolved since August, his appointment could inject a dovish tilt into the committee. In August’s meeting, two external members had voted for a rate cut, and Bhattacharya could now carry forward that baton.
External headwinds: Will global trends impact RBI’s decision?
While the domestic economy remains the central focus, global developments cannot be ignored. Notably, the US Federal Reserve recently started cutting rates, a move that could influence the RBI’s approach. Historically, the RBI’s monetary policy has been shaped by global trends, especially those originating in major economies like the US and the Eurozone. However, SBI’s report suggests that the central bank may adopt an independent approach, focusing more on domestic economic conditions than following in the Fed’s footsteps.
The Nuvama report, however, highlights that the Fed’s easing cycle could still play a role in the RBI’s decision-making process, even as India navigates its own growth-inflation dynamics. A shift in the Fed’s stance could offer more flexibility for the RBI to soften its own monetary stance in the coming months.
Deloitte India’s economist Dr. Rumki Majumdar suggested that the RBI may not go for a policy rate cut till it sees the last-mile inflation coming down sustainably.
“There are still risks of US inflation going up (given that inflation, at 2.5% YoY, is still above the Fed’s target rate of 2%) as the Fed starts easing monetary policy. Higher inflation in the West will cause imports to get costlier,” Majumdar added.
“The RBI would prefer to wait and watch the inflationary pressures that emanate from a myriad of risks and how the markets react to the US policy rate cuts,” she further said.
Future easing on horizon?
In its October meeting, the RBI is widely expected to maintain its repo rate at 6.50%, citing strong domestic growth and lingering inflation concerns. The newly constituted Monetary Policy Committee, including new external members, may produce at least one dissenting voice, advocating for rate cuts.
However, the RBI is likely to signal a shift in its monetary stance to neutral, paving the way for potential rate cuts later in the year as global and domestic economic conditions evolve. While the domestic economy shows signs of a slowdown, and inflation pressures have eased somewhat, the central bank’s cautious approach is expected to prevail for now, ensuring stability in the face of global uncertainties.
The upcoming Monetary Policy Meeting will be closely watched, not only for the decision itself but for the signals it sends about the future course of monetary policy in India.