Three out of six members on RBI's monetary policy committee acknowledged space for August rate cut: MPC Minutes

Three of the six members on the central bank’s monetary policy committee (MPC), which two weeks ago unanimously voted to keep rates unchanged, acknowledged space for an August rate cut even as Governor Sanjay Malhotra focused on external challenges to growth, minutes of the MPC meeting published Wednesday showed.

“While the case for stimulating private investments and urban demand remains, and the benign inflation outlook provides policy space, we may wish to wait and watch as the transmission of the existing actions takes place and how the trade policy uncertainties play out before considering policy actions at the October meeting of the MPC,” said external member Nagesh Kumar.

In the review meeting that concluded on August 6, the MPC kept the repo rate unchanged at 5.5% and retained the policy stance as ‘neutral’. This was the first status-quoist policy review outcome after Malhotra took over as the Reserve Bank of India (RBI) governor.

Malhotra, showed the minutes, focused on external challenges to domestic growth in the shape of likely trade barriers, and the impact of muted economic expansion on capacity and capital commitments in the private sector. Considering the current uncertain environment, annual GDP growth projection of 6.5% is resilient, he said.

“Uncertainty in external demand, driven by tariffs and geopolitical uncertainty, remains the major drag on growth as it also hinders private investment intentions, which is yet to show visible signs of improvement,” Governor Malhotra said.

Another external MPC member, Ram Singh, said that under normal circumstances, there would be a case for a growth-supportive interest rate cut given benign inflation prospects. However, the unusually high degree of uncertainty surrounding both inflation and growth calls for greater caution, Singh said.

'Transmission WIP'

According to Gaura Sengupta, chief economist, IDFC First Bank, the minutes show that members were more open to easing rates, but chose to pause as transmission of past policy action was underway. Tariff uncertainties and additional easing in the pipeline in the form of cash reserve ratio (CRR) cuts in the second half of the fiscal also influenced their voting decisions.

“The tariff impact on inflation is expected to be negative with exporters trying to find new markets as an alternative to the US,” Sengupta said. “Meanwhile, fiscal support for growth is coming into play with the proposed GST cut ahead of festival season. For now, we maintain expectations for another 25 bps cut in Q3FY26.”

Rajiv Ranjan, RBI’s executive director and internal MPC member, said bipartisan arguments—to cut repo rate by 25 bps or not -- were equally strong and delicately poised.

“The prudent course of action is to allow time for the recent policy easing to transmit fully into the economy and to assess its effects on real economic activity,” Ranjan was cited as saying in the MPC minutes. “An additional rate cut at the current juncture could also reduce our policy space should global or domestic risks materialise.”

RBI Deputy Governor Poonam Gupta said she did not see the scope or rationale for a further policy rate cut at this point. She also said that the uncertainties and structural factors seem to be more constraining for new investment and consumption decisions and not cost or availability of funds.