MUMBAI: The Reserve Bank of India (RBI), in its latest Monetary Policy Committee (MPC) meeting, made a calculated decision that surprised some market participants but resonated with others: it held the key policy repo rate steady at 5.5 per cent.
This “dovish pause” comes after a series of significant rate cuts, and the central bank is now taking a moment to assess the impact of its previous actions amid a challenging global landscape.
A brief history
The repo rate – the rate at which commercial banks borrow short-term funds from the RBI—is the central bank’s primary tool for managing inflation and stimulating economic growth. Its history is a pendulum swing, with the rate being hiked to combat high inflation and lowered to spur growth.
Recent months have seen the RBI on an easing path, having cut the repo rate by a cumulative 100 basis points since February 2025, including a surprise 50 basis points reduction in the previous policy meeting in June. These cuts were aimed at injecting liquidity and lowering borrowing costs for businesses and individuals.
GDP outlook
Despite the global uncertainties, particularly the new US trade tariffs on Indian goods, the RBI has held firm on its economic outlook. The central bank projects a resilient GDP growth of 6.5 per cent for the financial year 2025-26.
This confidence stems from strong domestic factors, including robust rural demand, healthy private consumption, and a continued push from government capital expenditure. The ongoing southwest monsoon is also a positive sign for the agriculture sector, further bolstering the outlook.
The RBI acknowledged, however, that these US tariffs and ongoing geopolitical tensions pose a downside risk, particularly to external demand and exports.
Benign inflation
The RBI’s decision to pause was heavily influenced by a surprisingly benign inflation environment. The Consumer Price Index (CPI) inflation has fallen to a 77-month low of 2.1 per cent, driven by a significant decline in food prices.
The central bank has revised its full-year inflation forecast for FY26 downward to 3.1 per cent from the earlier projection of 3.7 per cent. However, the RBI’s guidance suggests a watchful eye on the horizon. The central bank expects inflation to creep up, potentially rising above the 4 per cent mark from the fourth quarter of the fiscal year onwards, primarily due to base effects and a potential pickup in demand-side pressures.
Market reaction
The stock market’s reaction was a study in nuance. After an initial cautious start, the benchmark indices, Sensex and Nifty, traded lower. While a section of the market had hoped for another rate cut to boost sentiment, the consensus was that a pause was the most likely outcome, given the recent “front-loaded” cuts.
The RBI’s decision to wait and assess the full transmission of its previous cuts was seen as a prudent move.
Experts described the move as a “dovish pause,” indicating that while the central bank is not cutting rates now, it remains biased towards supporting growth, and further rate cuts are not off the table if inflation remains low.
This is a positive signal for rate-sensitive sectors like banking, auto, and real estate, which stand to benefit from cheaper borrowing costs in the long run. The market’s cautious stance was also influenced by global factors, particularly the US tariffs, which have introduced new uncertainties.
In essence, the RBI’s August policy can be summed up as a strategic pause to allow its previous actions to take full effect. It has a positive outlook on growth, a watchful eye on a potentially rising inflation trajectory, and is navigating a global environment fraught with trade and geopolitical risks.
The central bank’s stance signals a commitment to balancing price stability with sustainable economic growth, all while keeping its powder dry for a potential future action if circumstances warrant.
