Key rates left unchanged
The RBI kept the repo rate unchanged at 5.5%, in line with both consensus expectations and our own forecast, while maintaining a neutral policy stance. Notably, the RBI revised its CPI inflation projection for FY26 sharply downward - from 3.7% to 3.1% - closely aligning with our estimates.
On the growth front, the RBI retained its FY26 GDP forecast at 6.5%, with risks assessed as broadly balanced. Domestic economic activity remains resilient and continues to evolve in line with our expectations. However, the RBI flagged potential headwinds to external demand, citing ongoing tariff announcements and uncertainties surrounding trade negotiations.
We still expect another 25bp rate cut this year in 4Q
The primary trigger for further rate cuts is likely to be a meaningful downside surprise in growth. Looking ahead, high-frequency indicators point to a deceleration in GDP growth over the coming quarters. Our own forecast for FY26 GDP growth stands at 6.3% year-on-year, slightly below the Reserve Bank of India’s projection. In the interim, any breakdown in trade tariff negotiations with the US could introduce additional downside risks to growth, potentially prompting the RBI to reassess its outlook.
Moreover, with real policy rates still elevated relative to historical norms and inflation expected to average below the RBI’s medium-term target of 4% for the year, we maintain our expectation of a 25bp rate cut in the fourth quarter. That said, the RBI appears concerned about the pace of monetary transmission and may prefer to see more meaningful pass-through of lower policy rates to bank lending rates before initiating further easing.
Today's move should support the INR
The Indian rupee was the worst performer in the region last month, weighed down by volatile oil prices and lack of a trade deal with the US that was largely expected to be in favour of India. Instead, India received the highest tariff rate of 25% in the region. Given that the US accounts for almost 18% of India's exports, the 25% tariff rate could have a meaningful impact on GDP growth. However, we think it’s likely that both nations will continue the negotiations, using levers such as reducing imports from Russia, and India could end up with a lower tariff rate. In the interim, uncertainty could weaken investor sentiment, as also reflected in FII outflows in July. Today’s rate move should help INR stabilise, especially at a time when India’s policy rate differential with the US is at a multi-year l
