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The Reserve Bank of India's (RBI) decision to keep the repo rates unchanged in the August policy cycle is seen as a technical pause driven by inflation projections and growth dynamics, according to a report by SBI.
The SBI report noted that inflation is expected to remain below 3 per cent till the third quarter of FY26 but could rise sharply to 4.9 per cent in the first quarter of FY27. In such a scenario, and with expectations of robust GDP growth, the report added that the current 5.5 per cent repo rate may turn out to be the terminal rate. It stated, "We believe that if RBI inflation projections for FY26 may remain correct then 5.5 per cent repo rate may be the terminal rate." The SBI added that the scope for a cut in 2025 is limited, as policy actions have already been front-loaded and GDP growth is expected to remain strong in the first half of the year. This has pushed the bar for a rate cut even higher. However, if inflation undershoots, there may be room for a rate cut, at most 25 basis points, though the timing of any such move will be crucial. It stated, "The difficult part for such a further rate cut is that with front-loading already done and a frontloaded robust GDP growth in first half, the bar for a rate cut in 2025 has now moved even higher." In its policy statement, the RBI said it would closely track incoming data and domestic growth-inflation trends to guide future decisions. Factoring in steady monsoon progress, healthy Kharif sowing, adequate reservoir levels, and comfortable foodgrain stocks, the RBI revised its FY26 CPI inflation projection downwards by 60 basis points to 3.1 per cent. The MPC's decision, as per report, highlighted that the caution in an environment where inflation remains within target but future risks persist, making the August pause more of a technical adjustment than a shift in policy direction. (ANI)
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