US tariff, growth concerns may prompt RBI to cut rates again

New Delhi: The Reserve Bank of India (RBI) is likely to ease policy rates for the fourth time in a row as US tariff shocker poses fresh risks to economic growth even as inflation remains well within the central bank’s target range, analysts said.

"We expect RBI to continue frontloading with a 25 bps cut in August policy," SBI Research said in a note.

The RBI monetary policy committee is scheduled to begin its three-day meeting on Monday. The decision on policy rates will be announced on August 6.

Mandar Pitale, head of financial markets at SBM Bank India, said the current GDP and inflation data make a compelling case for accommodative action by the RBI.

"The upcoming August policy review will be an opportune time to deliver a 25 bps cut driven by low inflation and downward risk to growth," Pitale said.  

In the previous three bi-monthly meetings the central bank lowered the policy repo rate cumulatively by 100 basis points (1 percentage point).

In June, repo rate, the interest at which the RBI lends money to commercial banks for their short-term needs, was lowered by 50 basis points to 5.5%.

RBI Governor Sanjay Malhotra had termed the June decision as “frontloading” of the rate cut.

This was interpreted as a possible pause in the August policy. However, renewed concern to the economic growth due to the imposition of 25% tariff on Indian goods in the US may force the RBI to cut the policy rates again.

Most agencies estimate that the US tariff may dent India’s gross domestic product (GDP) growth by 0.2 to 0.3%. This means the GDP growth in the current financial year may fall closer to 6%, which will be the lowest since the Covid pandemic hit 2020-21. In the June policy review the RBI pegged the FY 2025-26 GDP growth at 6.5%.

A better-than-expected data on the inflation front may also prompt the RBI to go for another rate cut.

As per the latest National Statistics Office (NSO) data, the Consumer Price Index (CPI) based annual retail inflation eased to 2.10% in June, the lowest in over six years. The headline inflation has been below the RBI’s medium-term target of 4% since February.

"The good thing is that going forward the new CPI series with a lower weightage of food and more weightage to e-commerce could imply average CPI inflation continuing to undershoot, staying below 4% even in FY27," a research paper authored by SBI Group chief economic adviser Soumya Kanti Ghosh noted.

The Indian stock markets, which witnessed selling pressure last week, is likely to be guided by the RBI’s action in the coming days.

"Domestic equity market navigated a volatile week marked by heightened uncertainty surrounding trade negotiations and subdued earnings,” said Vinod Nair, head of research, Geojit Investments Limited.

“Going forward, investors will closely monitor the upcoming RBI rate decision next week, while the risks remain tilted to the downside. A stable inflation outlook, potential progress in trade talks and selective strength in domestic sectors are anticipated to lay the groundwork for a recovery,” Nair added.

Equated monthly installments (EMIs) on home, auto and other loans are guided by the RBI policy rate action. A cut in repo rate would be positive for rate-sensitive sectors like home, auto and consumer durables.

"A rate cut at this juncture, when housing sales have shown some moderation, will give a spur to housing sales and help developers realign their launch pipelines in sync with market realities. A reduced interest rate combined with stable prices will help fence sitters to enter the market," said Umesh Gowda, chairman of Bengaluru-based real estate developer Sanjeevini Group.

Highlights - Fiscal policy* Rate cut likely for 4th time in a row* Last 3 policies saw a total 100 points cut * In June, rate was lowered to 5.5%

How rate cuts could help* Liquidity boost* Accelerates domestic demand * Reduce impact of tariffs