RBI's next interest rate cut action likely in December

Synopsis
Reserve Bank of India may keep interest rates steady in August. However, further reduction is expected later this year. This follows a larger-than-expected cut aimed at boosting economic growth. Most institutions anticipate a rate cut in either October or December. The central bank will also lower the cash reserve ratio to inject liquidity. These measures surprised the markets.
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Limited Room for Policy Easing
Since then, economists and market participants have been debating the extent of further rate cuts that the central bank may take and by when, given governor Sanjay Malhotra’s statement that monetary policy was left with limited space to support growth after having reduced the repo rate by 100 bps since February. He added that the future course of action by the MPC will be data dependent.
Possible uncertainties include the June-September monsoon, US tariffs and their impact on growth and the potential for inflation to come in below projections. Despite challenges, there’s room for further reduction in the RBI’s repo rate, most participants said. The monsoon made landfall earlier than scheduled and while the weather office has said it will be above normal, there’s been a lull in rain in some parts of the country since then. Other areas have been hit by severe flooding.
The RBI will also lower the cash reserve ratio by 50 bps to 3% in phases, starting September, to infuse Rs 2.5 lakh crore liquidity in the system. Both measures — the extent of the rate cut and the CRR reduction — caught the markets off guard. “Everything that had been forecast for this calendar year happened in one policy,” a bond trader said, reflecting the market’s mood after the June 6 monetary policy announcement.
Following the governor’s statement on the limited space to support growth, some economists said the RBI is not just responding to short-term data, but is also aiming to help the Indian economy grow at its full potential. Malhotra has said that the aspiration is to grow at 8%, more than 6.5% projected by the central bank for FY26.
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