RBI MPC Meeting: Repo Rate Unchanged at 5.50% (Aug 2025)

RBI MPC Meeting: Repo Rate Unchanged at 5.50% Amidst Easing Inflation and Global Headwinds (August 2025)

The Reserve Bank of India's Monetary Policy Committee maintains a cautious stance, holding key rates steady while navigating a complex economic landscape.

RBI Maintains Status Quo Amidst Mixed Economic Signals

In its third bi-monthly monetary policy review for the financial year 2025-26, the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) announced on August 6, 2025, a unanimous decision to keep the benchmark repo rate unchanged at 5.50%. This move comes after a series of three consecutive rate cuts earlier in the year, totaling 100 basis points, as the central bank adopts a cautious 'neutral' stance to assess the full impact of previous easing measures and to navigate evolving domestic and global economic conditions.

The decision, unveiled by RBI Governor Sanjay Malhotra, reflects a delicate balancing act. While retail inflation has shown a significant downward trend, reaching multi-year lows, persistent global uncertainties, particularly concerning trade tariffs and geopolitical tensions, continue to pose risks to India's growth outlook. The MPC's wait-and-watch approach aims to ensure price stability while supporting the country's resilient economic growth trajectory.

Key Rates Held Steady: A 'Neutral' Approach

The six-member MPC, which convened from August 4 to 6, 2025, voted unanimously to maintain the policy repo rate under the Liquidity Adjustment Facility (LAF) at 5.50%. This decision directly impacts the short-term lending rate at which the RBI lends to commercial banks.

Key Policy Rates Unchanged:

• Repo Rate: 5.50%
• Standing Deposit Facility (SDF) Rate: 5.25%
• Marginal Standing Facility (MSF) Rate: 5.75%
• Bank Rate: 5.75%

Alongside the unchanged rates, the MPC also resolved to continue with its 'neutral' policy stance. This signifies that the RBI is not currently biased towards either tightening (raising rates) or further easing (cutting rates) monetary policy. Instead, it aims to remain flexible, ready to respond to evolving macroeconomic and financial developments. Governor Malhotra emphasized that this decision is "in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth." The central bank believes that the cumulative 100 basis points rate cuts implemented since February 2025 are still working their way through the economy, and a pause is necessary to observe their full transmission.

For borrowers, this means that while there is no immediate further relief in terms of repo rate cuts for EMIs, the impact of the earlier reductions is expected to continue translating into lower monthly loan installments in the coming months.

Inflation Outlook: A Benign Trajectory, But Vigilance Remains

A key factor influencing the MPC's decision was the significant moderation in inflation. Retail inflation (CPI) has continued its downward trend, declining for the eighth consecutive month to reach a 77-month low of 2.1% in June 2025. This notable drop was primarily driven by a sharp decline in food prices and favorable base effects. Food inflation, a substantial component of the CPI basket, even turned negative in June at -1.06%, marking its first time in deflationary territory since 2019.

Revised Inflation Forecasts for FY26:

• Full-year CPI Inflation: Revised down to 3.1% (from 3.7% in June)
• Q2 FY26: 2.1% (down from 3.4%)
• Q3 FY26: 3.1% (down from 3.9%)
• Q4 FY26: Maintained at 4.4%
• Q1 FY27: Projected at 4.9%

While headline inflation has moderated significantly, the RBI noted that core inflation, excluding volatile food and fuel components, rose slightly to 4.4% in June, partly influenced by rising gold prices. The central bank's revised full-year CPI inflation forecast for FY26 stands at 3.1%, which is comfortably within its target band of 4% (+/- 2%). However, the RBI cautioned that inflation could see an uptick from Q4 FY26 onwards, reaching 4.9% in Q1 FY27, due to potential base effects and demand-side pressures. This forward-looking assessment underscores the need for continued vigilance despite the current benign inflation environment.

Growth Outlook: Resilient Amidst External Challenges

Despite the prevailing global uncertainties, the RBI has maintained its projection for India's Real Gross Domestic Product (GDP) growth for FY26 at 6.5%. Governor Malhotra stated that India's domestic growth continues to be resilient, broadly evolving in line with earlier projections, albeit below the central bank's aspirations for higher growth.

GDP Growth Projections for FY26:

• Q1 FY26: 6.5%
• Q2 FY26: 6.7%
• Q3 FY26: 6.6%
• Q4 FY26: 6.3%
• Q1 FY27: Projected at 6.6%

The growth momentum is supported by several domestic factors, including strong rural demand, steady private consumption, and rising government capital expenditure. A favorable southwest monsoon, healthy Kharif sowing, and adequate reservoir levels are expected to bolster agricultural activity. Furthermore, the construction and services sectors continue to demonstrate robust performance. However, the RBI flagged concerns about uneven industrial growth, particularly in sectors like electricity and mining.

The central bank reiterated its aspiration for 7% growth, indicating that while the current projections are healthy, there is still room for acceleration. The 'neutral' stance allows the RBI the agility to act swiftly if conditions warrant further measures to support growth.

Navigating Global Headwinds: Tariffs and Geopolitical Tensions

A significant part of Governor Malhotra's address focused on the challenging global environment, particularly the escalating trade tensions. The MPC meeting took place against the backdrop of recent announcements of a 25% tariff rate imposed by the US on India's exports, with warnings of potential increases if India continues its oil trade with Russia.

The RBI acknowledged that while financial market volatility and geopolitical uncertainties have somewhat abated from their recent peaks, "trade negotiation challenges continue to linger." These external headwinds, coupled with prolonged geopolitical tensions and volatility in global financial markets, pose considerable risks to India's growth outlook and the broader economic stability.

Governor Malhotra, however, expressed a cautious optimism, stating that the central bank does not foresee a "major impact" of the US tariffs on India's economy unless retaliatory tariffs are imposed. He emphasized that India is less dependent on external factors for inflation, providing some insulation. The RBI affirmed its commitment to taking all necessary steps, including monetary policy, liquidity management, and prudential regulations, to support economic growth amidst these uncertainties. The ongoing trade negotiations are being closely monitored, with hopes for an amicable solution.

The central bank's vigilance extends to the global crude oil prices, as a 10% rise could potentially push up headline inflation by 20 basis points, underscoring the importance of reducing import dependence and exploring alternative fuels.

A Measured Path Forward

The RBI's Monetary Policy Committee's decision to hold the repo rate at 5.50% in August 2025 reflects a measured and prudent approach. With inflation significantly moderating and domestic growth showing resilience, the central bank is allowing time for the full transmission of its earlier rate cuts to permeate the economy. At the same time, it remains highly vigilant to the evolving global trade landscape and geopolitical risks. This 'neutral' stance provides the RBI with the necessary flexibility to respond effectively to future economic data and external developments, ensuring price stability while fostering sustainable growth in the Indian economy. The next MPC meeting is scheduled for September 29 to October 1, 2025, where further assessments will guide the central bank's monetary policy path.