RBI’s Inflation Victory: What Next for Monetary Policy?

Source Credit : Portfolio Prints

The Battle Won, But War Continues

Last week, RBI Governor Sanjay Malhotra declared that the central bank has "won the battle against inflation"—driven by retail inflation slipping to just 2.10 % in June, the lowest since January 2019. But he cautioned that "the war continues," emphasising that price stability remains the RBI’s core focus under its flexible inflation targeting framework.

June’s Surprise: A Larger Rate Cut

In early June, the Monetary Policy Committee (MPC) surprised markets with a 50‑basis‑point repo rate cut, after smaller reductions in February and April, resulting in a cumulative 100 bps easing since February 2025. Simultaneously, the policy stance shifted from "accommodative" to "neutral," signalling greater flexibility but a higher threshold for further rate cuts.

Disinflation and Demand Weakness

Retail inflation dropped dramatically, and core inflation (excluding food and fuel) also weakened—flagging cooling domestic demand, particularly in sectors like real estate and automobiles. Analysts are cautioning about a slowdown in investment and urban consumption, suggesting that monetary support may still be needed.

What Lies Ahead: Policy Decisions and Timing

At the upcoming MPC meeting on August 6, the repo rate is widely expected to remain unchanged at 5.50 %. About 75 % of economists surveyed in a Reuters poll anticipate a pause, though 25 % foresee another 25 bps cut later this year—possibly in September or October.

Governor Malhotra emphasized that decisions will be forward‑looking, anchored on growth and inflation forecasts—not just current data. The neutral stance allows for upward or downward moves, depending on evolving conditions

Economic Outlook and Transmission

India’s GDP growth has remained robust, with 7.4 % year-on-year growth in Q1 FY 2026. Faster transmission of interest rate cuts is boosting credit flows and supporting industrial activity. However, softening activity indicators and continued investor caution suggest the RBI might still face a growth‑inflation balancing act.

Strategic Reset: What to Expect from RBI

• No immediate rate cuts at the August meeting, unless surprises emerge in inflation or growth metrics.




• Room for one more cut by year-end, contingent on persistent disinflation and weak demand indicators.




• Policy stance: neutral, but flexible enough to respond to shifts in global or domestic headwinds.




• Inflation mandate review underway—RBI plans to issue a discussion paper soon inviting stakeholder input as the existing framework (4 % ± 2 %) is due for review.

Broader Implications

• Fixed-income markets: foreign investors have reclaimed appetite for Indian bonds, buying roughly ₹12,900 crore amid rate-cut expectations and favourable yield spreads.




• Fiscal constraints: limited scope for government stimulus means monetary policy may need to do more of the heavy lifting if growth decelerates further.

Summary Table

Topic	Key Insight
Inflation Status	CPI at 2.10% in June; likely record low in July
Rate Decisions	Repo rate at 5.50%, neutral stance maintained
Future Cuts?	Possible one 25bps cut later in 2025 (data-driven)
Focus Areas	Forecast-based decision-making, credit transmission, demand weakness
Risks	Lingering slack in private sector demand; limited fiscal policy levers
Policy Mandate	Flexi inflation targeting under review

Final Takeaway

The RBI has clearly scored a success in cooling inflation back within its tolerance band. However, the central bank has reaffirmed that the journey isn't over—focusing on future projections and maintaining policy flexibility. As India edges into late 2025, all eyes will be on inflation and growth updates. Another modest rate cut remains on the table—whether the RBI acts will depend on whether disinflation is durable and demand shows signs of revival.