Based on a poll of top economists, the Reserve Bank of India’s policy meeting on August 6 is highly unpredictable, with a significant split on the timing of a rate cut.
Here is a summary of the key points from the provided text and recent developments:
On the Rate Cut:
- Split Decision: Economists are evenly divided, with half expecting a 25 basis point rate cut and the other half anticipating the Monetary Policy Committee (MPC) will keep rates unchanged.
- Reasons for a Cut:
- Inflation has fallen to a 77-month low, with the CPI expected to average below 3% for the year.
- Some economists, including those from SBI, warn that delaying a rate cut could be a “type two error,” hurting growth when inflation is already under control.1
- A rate cut now could support demand during the festive season.2
- Reasons for a Pause:
- The RBI has already cut the repo rate by a cumulative 100 basis points in three consecutive meetings (a 25 bps cut in February, another 25 bps in April, and a 50 bps cut in June), and may want to pause to assess the impact of these previous cuts.3
- Global trade tensions and a hawkish stance from the US Federal Reserve could push the RBI toward a wait-and-watch approach.4
- The transmission of previous rate cuts to the broader economy is not yet complete.5
- Terminal Rate: Most economists believe the current easing cycle is nearing its end, with the terminal policy rate likely to settle at 5.25%, meaning just one more 25 basis point cut is expected.
- Timing of the Final Cut: There is no consensus on the timing of the next and final rate cut, with a poll showing 30% expect it in August, 30% in October, and the most common prediction being December.
On Policy Stance and Projections:
- Policy Stance: All economists agree that the RBI will maintain a “neutral” stance. However, the tone of the policy statement may turn dovish due to easing inflation and mixed growth signals.6
- Inflation Forecast: 90% of economists expect the RBI to revise its inflation forecast downward, possibly to around 3.0–3.3% from the previous projection of 3.7% for the financial year.
- Growth Forecast: 70% of respondents believe the RBI will keep its growth forecast unchanged, although it may highlight signs of slowing momentum.
- External Risks: While half of the economists say global trade tensions will not directly influence policy, 40% believe these external risks could prompt the RBI to ease further.
Other Key Points to Watch:
- Updates on the liquidity management framework.7
- Comments on the growth outlook.
- A possible extension of external benchmark-linked lending rates to NBFCs.