Main target will be growth, not prices; RBI rate cuts unlikely soon: Economists

Mumbai: A majority of economists say that growth, rather than inflation, will be the primary driver of monetary policy decisions while adding that the Reserve Bank of India is unlikely to cut the policy repo rate further from 5.5% now.

"We believe that growth would guide the RBI's thought process as inflation remains benign. We do not see any further cuts in our base case," Rahul Bajoria and Smriti Mehra, economists at BofA Securities India, wrote in a report.

Inflation as measured by consumer price index fell to 1.55% in July-the lowest since June 2017 and well below the central bank's inflation target range of 2-6%, data released on Tuesday showed. The RBI's monetary policy committee (MPC) has reduced the repo rate by 100 bps since February, but left it unchanged at 5.5% last week. The MPC's next decision will be announced on October 1.

The central bank reduced CPI forecast for the current financial year by 60 basis points but retained GDP growth forecast at 6.5%.


Economists said there would be a rate cut only if the 50% US tariffs on India significantly impact growth.

"Given the inflation outlook, the RBI has room to cut rates further by 25-50 bps in case there is evidence that growth is slowing down significantly due to tariff shocks," said Sakshi Gupta, principal economist at HDFC Bank. "For now, we do not expect further rate cuts."

HDFC Bank has retained the GDP growth estimate at 6.3% due to likely offsetting factors and on the possibility that the US tariffs could be negotiated down, she said.

Sameer Narang, head, economic research group at ICICI Bank, does not see any rate cut from RBI if growth remains sustainably above 6%. "As of now, we foresee growth at 6.3% which also does not call for any more rate cuts. However, if downside risks to growth are visible because of external headwinds, then easing may again be on the table," he said.

Economists said the June quarter GDP data, due for release on August 29, will be keenly watched for cues on the RBI's rate action. However, this data will not include the impact of tariffs as the US duties came into effect this month. Even as the consensus view is inclined towards 5.5% as the terminal repo rate, a few economists expect further reduction.

Economists at HSBC India believe that if some of the weak high frequency data from June continue, the RBI can mark down its growth forecast and deliver a 25 basis point rate cut in the fourth quarter of 2025, taking the repo rate to 5.25%.

Nomura sees 5.00% as the terminal rate as it expects 25 bps cut each in October and December policy meetings. "The MPC's data-dependent approach has left the door open to future cuts, even if it did not explicitly signal one," it said.