The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) faces a finely balanced decision on interest rates, with economists divided between an immediate rate cut and a pause. The three-day meeting of the MPC, scheduled from September 29 to October 1, comes against the backdrop of slowing growth, falling inflation, and global market volatility.
Economists split on action
SBI Research, in its latest report, argued in favour of a 25 basis points cut, citing the sharp decline in inflation and the need for a forward-looking stance. The report highlighted that consumer price inflation (CPI) for FY27 is tracking at 4 per cent or lower, with October CPI projected to fall to around 1.1 per cent — the lowest since 2004 — after the Goods and Services Tax (GST) rationalisation.
“There is no point in committing a Type II error again by not cutting rates now. A timely cut would also project RBI as a forward-looking central bank at a time when global yields are hardening,” SBI Research said.
Cautionary voices urge a pause
In contrast, IDFC First Bank has recommended that the RBI hold rates steady this time, arguing that a cut should depend on how growth risks evolve in the coming months. The bank’s report noted that GST rationalisation could add 0.6 percentage points to GDP, but escalating trade tensions with the United States might shave off as much as 1 percentage point.
“From a real rates perspective, there is space to cut, but the need will depend on growth risks. RBI is likely to wait for clarity post-festive season and cut in December if downside risks materialise,” the IDFC First Bank note stated.
Market expectations
According to market analysts, the consensus view leans towards a pause in September, with a potential cut later in the fiscal year if economic conditions worsen. Moneycontrol earlier reported that bankers have largely ruled out a cut in the upcoming policy, but they expect at least one more reduction during the current financial year.
The RBI has already reduced the repo rate by 100 basis points since February, before opting for a pause in the August policy review. The September decision, if unchanged, will mark the second consecutive hold.
Inflation at record lows
Supporters of an immediate cut point to the record-low inflation levels. Headline CPI stood at 2.05 per cent, well below the RBI’s target range, and analysts suggest it could dip further due to GST rationalisation. Proponents argue that delaying a cut now could “amplify future costs” of supporting growth if economic conditions deteriorate further.
However, those calling for patience say it would be prudent to assess the impact of the festive demand season and the evolving trade environment before committing to further easing.
Tightrope walk for RBI
For the central bank, the upcoming policy is a delicate balancing act between maintaining credibility in inflation management and ensuring adequate support to growth. With global uncertainties, including US-China trade tensions and potential spillovers from tariff measures announced by the United States, the MPC’s guidance will be closely watched.
The decision, whichever way it goes, is expected to shape market sentiment for the rest of the year and provide cues on the RBI’s broader strategy for growth and inflation management.