Introduction to Monetary Policy
The Monetary Policy Committee (MPC) is set to meet on August 4, 2025, to decide on the future of interest rates in India. Ahead of this meeting, SBI Research has predicted that the committee will cut interest rates by another 25 basis points. This prediction is based on the current economic trends, including tariff revisions, GDP growth, and inflation projections.
Economic Trends and Inflation Projections
According to SBI Research, the key economic trends are being addressed early, and delaying action could be counterproductive. The report states that inflation will continue to remain range-bound even in FY27, and therefore, there is no point in delaying the interest rate cut. The current inflation rate is well below the 4% target, creating headroom for the RBI to consider more cuts. Consumer price inflation has stayed under the 4% mark since February, reaching a six-year low of 2.82% in May.
Impact of Interest Rate Cuts on Credit Growth
The report also analyzed past trends of credit growth around the Diwali period with respect to repo rate cuts. It found that any repo rate cut ahead of Diwali boosts credit growth more vigorously till Diwali. A low-interest rate regime before pre-Diwali leads to better credit growth, and cutting interest rates now will result in frontloaded transmission too. This means that cutting interest rates before the festive season will lead to increased borrowing and spending, which can boost economic growth.
Finance Ministry’s Review and Expert Opinions
The Finance Ministry, in its latest monthly economic review, also outlined scope for further rate cuts. The ministry believes that the RBI can continue its accommodative stance without stoking price pressures. However, some market experts believe that the central bank may hold the benchmark repo rate steady at 5.5% in the upcoming bi-monthly policy review. They think that the RBI may use this meeting to reassess global uncertainties, particularly elevated US tariffs, and gauge the impact of past actions before moving further.
Conclusion
In conclusion, the upcoming MPC meeting on August 4, 2025, will be crucial in determining the future of interest rates in India. With inflation under control and economic trends being addressed early, there is a strong case for another interest rate cut. The predicted 25 basis point cut could boost credit growth and economic activity, especially with the festive season approaching. However, the RBI will need to balance its decision with global uncertainties and the impact of past actions. Ultimately, the decision will depend on the six-member MPC, which comprises experts from the RBI and external members.
