30 Indian Minds Leading the AI Revolution

RBI likely to keep interest rates unchanged on August 6

US tariffs on Indian exports and wage pressures could increase the stress on growth, thereby raising the chances for more rate cuts towards the year-end

By Salil Panchal Forbes India Staff

Published: Aug 5, 2025 05:44:17 PM IST

Updated: Aug 5, 2025 05:49:07 PM IST

Full Bio

Reserve Bank of India (RBI) Governor Sanjay Malhotra. Image: Reuters/Francis Mascarenhas

After front-loading interest rate cuts, the Reserve Bank of India (RBI) is expected to keep rates unchanged after its monetary policy meeting ends on August 6. Though factors such as the recent US tariff hikes against India, the rupee volatility and wage pressure increase uncertainties in the economy, the central bank is likely to “wait and watch” until more clarity emerges from these situations. The RBI has cut interest rates at its previous three policy meetings by 100 basis points, bringing the repo rate to 5.5 percent.

“Having already frontloaded rate cuts and ensuring adequate liquidity, the MPC is likely to pause and allow time for the effects of previous measures to filter through the economy,” the research team of Bajaj Broking, said in a note to clients. “Any further rate action—if deemed necessary—is anticipated only in October or beyond, once more data on festive demand, agricultural output, and global conditions is available.”

Sakshi Gupta, principal economist at HDFC Bank told Forbes India that the problem is not whether the RBI has space to cut interest rates. “The question is, is there a need to cut rates? We do not expect a change in rate decision immediately. The RBI has done enough. It is now time to wait and see how it flows into the system,” she says.

Gupta adds that the 25 percent tariffs on Indian goods presents a downside risk of 20 to 25 basis points to India’s GDP growth. This is based on price and income elasticity of Indian exports, the importance of the US market for India across different export sectors, and accounting for some near-term impact on exports due to slowdown of US orders until India BTA deals [under negotiation] are signed [probably by later this year],” her August 4 note to clients said.

Also read: Trump tariff decision transitionary; economists rule out rate cut by RBI

GDP growth forecast largely unchanged

Gupta continues to keep India’s FY26 GDP growth forecast unchanged at 6.3 percent, due to some offsetting factors that might be at play and the possibility that these tariffs could be negotiated down. She believes that the possibility of tariffs on India being negotiated down to 15 to 20 percent “remains in place. If this were to happen, it would broadly align with tariffs imposed on other Asian peers.”

Currently, US accounts for 20 percent of India’s total goods exports, which works out close to $86 billion. But, as a percentage of India’s GDP, goods exports to the US are just 2 percent. The average tariff rate on Indian exports by US stood at 2.8 percent earlier, her note said.

In this scenario, the RBI would prefer to see how the global macro picture plays out, before deciding on immediate rate cuts. But once further clarity emerges on this front and also on the domestic consumption demand for goods and services, the chances of a further rate cut will increase towards the end of the year.

CPI inflation in India continues to be below the central bank’s projections. Retail inflation was seen at 2.1 percent—a six-year low—as of June 2025. “On current trends, FY26 inflation should undercut the RBI’s 3.7 percent estimate by a wide margin, leaving the door ajar for further policy easing if external risks crystallise,” says Sujan Hajra, chief economist at Anand Rathi Group.

Hajra says a pause now would allow policymakers to assess the full impact of the monsoon on food prices, the pass-through of earlier easing on economic activity and the impact of disruptive US trade policies. “The policy stance, in all likelihood, will remain neutral with a dovish bias—entirely in keeping with the RBI’s annual report, which puts a premium on supporting growth as inflation ebbs and economic momentum gradually recover,” he says.

Fitch has last month revised India’s GDP growth forecast slightly downward to 6.3 percent from a 6.4 percent earlier, saying that the US tariff will have a limiting impact on the Indian economy. Moody’s Ratings has projected India’s GDO growth for FY26 at 6.5 percent and International Monetary Fund has pegged India’s GDP growth at 6.4 percent for the current fiscal year. Most economists at domestic banks have projected India’s GDP to be at around 6.4 percent.