NE BUSINESS BUREAU
MUMBAI, CHENNAI, PUNE, AUG 6
After three successive interest cuts, the Reserve Bank on Wednesday decided to keep the policy rate unchanged at 5.5 per cent and retained the neutral stance, weighed by concerns over tariff uncertainties.
Announcing the third bi-monthly monetary policy of the current fiscal, RBI Governor Sanjay Malhotra said that the growth rate projection for FY26 has been retained at 6.5 per cent. He further said the Monetary Policy Committee (MPC) unanimously decided to keep the short-term lending rate or repo rate unchanged at 5.5 per cent with a neutral stance.
With regard to inflation forecast, the governor lowered the projection to 3.1 per cent from the earlier estimate of 3.7 per cent for the current financial year. Since February 2025, the RBI has reduced the policy rate by 100 basis points. In its previous policy review in June, it had trimmed the repo rate by 50 basis points to 5.5 per cent.
The central bank has been tasked by the government to ensure that consumer price index (CPI) based retail inflation remains at 4 per cent with a margin of 2 per cent on either side. Based on the recommendation of the MPC, the RBI reduced the repo rate by 25 bps each in February and April, and 50 basis points in June, amidst easing retail inflation.
The retail inflation is trending below 4 per cent since February this year. It eased to a six-year low of 2.1 per cent in June, aided by an easing of food prices and a favourable base effect.
Food inflation, which accounts for nearly half of the Consumer Price Index (CPI) basket, slipped to (-)1.06 per cent in June from 0.99 per cent in May. The decline was largely driven by lower prices in key categories such as vegetables, pulses, meat and fish, cereals, sugar, milk, and spices.
RBI is in a ‘wait and watch’ mode, say experts
Sakshi Gupta, Principal Economist – HDFC Bank, said: “Despite the significant downward revision in its inflation forecasts, mixed macro trends so far in Q1 and tariff headwinds lingering on, the RBI decided to keep its policy rate unchanged at 5.5% as expected and kept its stance unchanged at neutral. The MPC decision was unanimous.
While a neutral stance indicates limited scope for further easing, the governor hinted that future action would be dependent on how growth performs – therefore, not closing the door on further rate cuts completely in the post policy press conference. Defacto given the inflation projections, the space for another 25-50bps rate cut remains in place, although the RBI would exercise that only if there is a significant downside risk to growth – both due to domestic activity performance and the tariff impact. Only if the tariff outcome becomes decisively negative between now and the October policy, the probability of a rate cut could then increase for the October policy. For now, we expect that the policy rate remains unchanged at 5.5% for FY26.
In our base case we project GDP growth at 6.3% for FY26 (lower than the RBI’s projection of 6.5%). However, in the case where tariffs remain elevated at current levels and/or are further raised we see a downside risk of 20-25bps to our GDP growth forecast for the year. On the one hand, while we see relative rupee depreciation, pick-up in rural activity, and frontloaded monetary easing and fiscal spending to provide support to growth, on the other hand, the impact of higher tariffs on exporters (particularly MSMEs), delay in capex plans and hiring present significant risks to the outlook.”
Binod Kumar, MD & CEO, Indian Bank, said: “As RBI had front loaded rate cate, it was expected to maintain status quo. It is welcome move. However, it leaves room to reconsider in coming months as CPI is benign and a push for growth may be required. At Indian Bank, we have already passed on benefits of previous rate cut and expect further normalisation in MCLR as cost of fund continue southward journey.”
Anuj Puri, Chairman – ANAROCK Group, said: “Indian real estate weathers unrelenting turbulence as the sentiment is pressured by Trump’s new 25% tariffs and a notable 20% plunge in housing sales across top metros, as per the latest ANAROCK data. In Q2 2025 alone, just 96,285 homes were sold, a steep fall from 120,335 a year ago, indicating increasing buyer hesitancy and market uncertainty. Amid these headwinds, the central bank’s policy choices come with high relevance to initiate a turnaround and arrest further market deterioration.
The RBI has decided to keep the repo rates unchanged at 5.5%, also taking cognizance of the ongoing tariff uncertainties and the possible impact on the Indian economy. A rate cut leading to lower interest rate environment would have particularly boosted the affordable housing segment, which has been under considerable pressure in recent years.
ANAROCK data shows that average residential prices across the top 7 cities combined have increased by 39% in the last two years alone – from INR 6,470 per sq. ft. as of Q2 2023 to INR 8,990 per sq. ft. as of Q2 2025. The affordable housing segment’s fate may be further dampened by the ongoing global trade tensions and tariffs imposed by the Trump administration. This is largely because of its impact on the MSMEs – the key target audience of the affordable segment.
That said, overall, homebuyers are currently driven by long-term confidence rather than short-term rate fluctuations. Given the upcoming festive season, developers may look to keep the market momentum going with offers and flexible payment plans, which may help improve affordability for many genuine buyers.”
