RBI’s Rate Pause In August Seen As Tactical Move Amid Strong Growth Outlook: SBI

SBI analysts noted that inflation is projected to stay below 3 per cent until the third quarter of FY26, offering the central bank some breathing room on rate actions

With policy decisions already front-loaded and GDP growth expected to stay robust through the first half of 2025, the bar for any reduction in rates has been raised considerably

Source : PTI

The Reserve Bank of India’s decision to hold the benchmark repo rate steady at 5.5 per cent in its August monetary policy review is being seen as a calculated pause rather than a change in stance, according to a recent report by the State Bank of India (SBI). The central bank’s move, the report suggests, is primarily guided by its inflation outlook and expectations of strong economic growth.

SBI analysts noted that inflation is projected to stay below 3 per cent until the third quarter of FY26, offering the central bank some breathing room on rate actions. However, they flagged a potential spike to 4.9 per cent in the first quarter of FY27, which could limit future policy flexibility.

The report stated, “We believe that if RBI inflation projections for FY26 may remain correct then 5.5 per cent repo rate may be the terminal rate,” indicating that no further rate hikes are expected unless inflation surprises significantly on the upside.

Limited Scope For Rate Cuts In 2025

With policy decisions already front-loaded and GDP growth expected to stay robust through the first half of 2025, the bar for any reduction in rates has been raised considerably. The SBI report highlighted that unless inflation undershoots projections, there may be little room for a rate cut, and even then, only a modest one, up to 25 basis points.

“The difficult part for such a further rate cut is that with front-loading already done and a frontloaded robust GDP growth in first half, the bar for a rate cut in 2025 has now moved even higher,” the report said.

RBI Revises Inflation Outlook, Emphasises Vigilance

In its policy communication, the RBI said it would continue to monitor economic indicators and inflation trends to shape its future decisions. The central bank also revised its CPI inflation forecast for FY26 downward by 60 basis points to 3.1 per cent, citing favourable monsoon progress, good Kharif sowing, sufficient reservoir levels, and strong foodgrain stocks.

The SBI report concluded that the Monetary Policy Committee's decision should be seen in the context of macroeconomic stability, where inflation remains within target but potential risks remain.