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RBI Holds Repo Rate at 6.5%, Pauses Rate Cut Expectations

RBI Maintains Repo Rate at 6.5%; SBI Research Predicts No Rate Cuts in 2025 Amid Persistent Inflation Concerns

In a widely anticipated move, the Reserve Bank of India (RBI) has decided to keep its key policy repo rate unchanged at 6.5% during its latest Monetary Policy Committee (MPC) meeting. This marks the ninth consecutive time the central bank has held the rate steady, reflecting a cautious stance amid ongoing inflationary pressures and global economic uncertainties. The decision underscores the RBI's commitment to balancing economic growth with price stability, even as domestic and international factors continue to influence monetary policy directions.

The repo rate, which is the rate at which the RBI lends money to commercial banks, has remained at this level since February 2023. This stability comes against a backdrop of India's economy demonstrating resilience, with GDP growth projected to hover around 7% for the fiscal year. However, the RBI's primary concern remains inflation, which has been stubbornly above the target range. Retail inflation, measured by the Consumer Price Index (CPI), stood at 5.08% in June, driven largely by volatile food prices, particularly in vegetables and pulses. The central bank aims to keep inflation within a 4% target band, with a tolerance of plus or minus 2%. Governor Shaktikanta Das emphasized during the policy announcement that while growth momentum is strong, the RBI cannot afford to let its guard down on inflation, which could erode purchasing power and hinder sustainable development.

The MPC, comprising six members including external experts, voted 4-2 to maintain the status quo on rates. The two dissenting members advocated for a rate cut, arguing that easing monetary policy could provide a boost to consumption and investment in an environment where industrial output has shown signs of moderation. Despite this, the majority view prevailed, with the committee retaining its stance of "withdrawal of accommodation." This stance signals that the RBI is still in the process of normalizing liquidity after the aggressive rate hikes implemented in response to post-pandemic inflationary surges.

Adding a layer of insight to the RBI's decision, a report from SBI Research has cast doubt on the prospects of any rate cuts in 2025. According to the state-owned bank's analysis, the likelihood of monetary easing next year has diminished significantly due to several intertwined factors. Firstly, persistent food inflation remains a wildcard, with erratic monsoon patterns and supply chain disruptions potentially keeping price pressures elevated. SBI economists point out that vegetable inflation alone surged to over 30% in recent months, and without a decisive moderation, the RBI will be compelled to prioritize inflation control over growth stimulation.

On the global front, SBI Research highlights the influence of the US Federal Reserve's policies. With the Fed signaling a more gradual approach to rate cuts amid its own inflation battles, emerging markets like India face the risk of capital outflows if domestic rates are lowered prematurely. The report notes that any divergence in interest rate trajectories could strengthen the US dollar, putting downward pressure on the Indian rupee and exacerbating imported inflation through higher oil and commodity prices. Brent crude, for instance, has been volatile, trading above $80 per barrel, which directly impacts India's import bill given its heavy reliance on energy imports.

Furthermore, SBI's analysis delves into domestic fiscal dynamics. The Union Budget for 2024-25 emphasized fiscal consolidation, with the government aiming to reduce the fiscal deficit to 4.9% of GDP. While this is positive for long-term economic stability, it might constrain public spending, making private sector borrowing more critical. In such a scenario, high interest rates could dampen credit growth, but SBI argues that cutting rates too soon risks reigniting inflation, especially if global uncertainties—such as geopolitical tensions in the Middle East or trade disruptions—persist.

The report also touches on sectoral impacts. For borrowers, particularly in housing and automotive segments, the steady repo rate means continued high EMIs and loan costs. Home loan rates from major banks like SBI itself remain in the 8-9% range, potentially slowing down real estate recovery. On the positive side, depositors benefit from attractive fixed deposit rates, encouraging savings amid economic volatility. For businesses, especially small and medium enterprises (SMEs), the unchanged rates imply stable but elevated borrowing costs, which could affect expansion plans. SBI Research forecasts that credit growth might moderate to 14-15% this year, down from previous highs, unless external conditions improve.

Looking ahead, the RBI's forward guidance suggests that rate cuts could be on the table only if inflation sustainably trends towards the 4% target. Governor Das reiterated the need for vigilance, citing risks from climate change-induced food supply shocks and potential wage pressures in a growing economy. The central bank has also kept its growth projection for FY25 at 7.2%, with quarterly estimates showing a slight uptick in the latter half of the year, driven by rural demand revival and manufacturing rebound.

SBI Research, however, paints a more conservative picture for 2025. It predicts that the repo rate might remain at 6.5% throughout the year, with the earliest possibility of a cut pushed to 2026. This outlook is based on econometric models that factor in variables like core inflation (excluding food and fuel), which has been sticky around 3-4%, and external balances. The current account deficit is expected to widen marginally due to import dependencies, adding another layer of caution for the RBI.

Experts across the board echo these sentiments. Economists from other institutions, such as HDFC Bank and ICICI, have similarly revised their rate cut expectations downward, aligning with SBI's view. The consensus is that while India's economy is on a solid footing—evidenced by robust services sector PMI and increasing foreign direct investment—the path to rate normalization will be gradual. Any premature easing could lead to asset bubbles or currency instability, lessons drawn from past cycles.

In summary, the RBI's decision to hold rates steady reflects a prudent approach in an uncertain world, prioritizing inflation management over immediate growth impulses. SBI Research's prognosis of no rate cuts in 2025 reinforces this narrative, urging stakeholders to prepare for a prolonged period of monetary stability. As India navigates these challenges, the interplay between domestic policies and global events will be crucial in shaping the economic landscape. This steady-hand policy could ultimately foster a more resilient economy, even if it means short-term sacrifices for borrowers and businesses. (Word count: 928)

Read the Full Business Today Article at:
[ https://www.businesstoday.in/india/story/rbi-holds-repo-rate-steady-sbi-research-says-2025-rate-cut-now-unlikely-488165-2025-08-06 ]