RBI's Cautious Stance Amidst Global Headwinds

Lucknow / Mumbai : In a unanimous decision that was widely anticipated by the market, the Reserve Bank of India (RBI) today kept its policy rate unchanged at 5.5%, retaining its "neutral" stance. This decision comes despite a significant downward revision in the central bank's inflation forecasts and a mixed macroeconomic performance in the first quarter of the fiscal year. The lingering uncertainty surrounding new trade tariffs appears to be a key factor in the RBI's cautious approach.

According to Ms. Sakshi Gupta, Principal Economist at HDFC Bank, the neutral stance suggests that the scope for further easing is limited. However, she notes that the RBI Governor has not completely closed the door on future rate cuts, hinting that any future action would be contingent on how growth performs. The RBI's projections for inflation, in fact, leave room for a potential 25-50 basis point rate cut, but this would likely be implemented only if there is a substantial downside risk to growth, particularly due to the domestic activity and the impact of the ongoing tariffs.

The consensus within the RBI seems to be a wait-and-watch approach, with the central bank closely monitoring economic data and the fallout from the tariff situation. HDFC Bank's base case projects a GDP growth of 6.3% for FY26, which is lower than the RBI's own projection of 6.5%. Ms. Gupta points out that if tariffs remain at their current elevated levels or are further increased, there could be a downside risk of 20-25 basis points to their GDP growth forecast. While factors like a depreciating rupee, a pick-up in rural activity, and frontloaded monetary and fiscal support are expected to aid growth, the negative impact of higher tariffs on exporters, especially MSMEs, and potential delays in capital expenditure and hiring present significant risks to the overall economic outlook.

Ultimately, the probability of a rate cut may increase for the October policy if the tariff outcome becomes decisively negative in the coming months. For now, however, the expectation is that the policy rate will remain at its current level of 5.5% for the remainder of FY26.