RBI may go for another 25 bps rate cut in August, repo rate to come down at 5.25%: Report
The report explained that the growth outlook in India remains mixed. While urban demand is weak, rural demand continues to remain strong. Goods exports to the United States are showing improvement, but exports to other regions remain weak.
Considering these trends and the current inflation situation, the report believed that August is the right time for a rate cut.
It stated "we believe this opens up policy space for an additional 25bps rate cut, taking the terminal rate to 5.25 per cent. When would the MPC cut the policy rate? We believe that August would be the appropriate time for the same, given the muted inflation scenario".
The report added that inflation has been much lower than expected since the last MPC meeting. It now estimates inflation for FY26 to average at 2.9 per cent, which is much lower than RBI's earlier projection of 3.7 per cent.
This downward trend in inflation opens up space for further policy easing, especially since the MPC currently maintains a neutral stance, which means decisions depend on economic data.
The report also mentioned that inflation is expected to rise in Q4 and FY27 due to the base effect. Therefore, the opportunity for the MPC to cut rates may not be available later in the year.
On the global front, the report said that the economic outlook remains uncertain and volatile due to tariffs and geopolitical events. A brief conflict in the Middle East last month led to a sharp rise in oil prices.
Also, the recent tariffs announced by U.S. President Donald Trump, set to be implemented from August 1, are higher than current levels and are already reflecting in inflation data. U.S. inflation rose to 2.7 per cent year-on-year in June from 2.4 per cent in May.
While the U.S. economy has performed better than expected, there are signs of slowing momentum. Private hiring is weakening and retail sales have dropped, which indicates possible stagflation in the near term.
This situation is currently preventing the U.S. Federal Reserve from cutting interest rates. However, as growth weakens further in the coming months, the Fed may turn more supportive of rate cuts later this year.
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