CONTEXT WILL BE TRUMP’S PENAL TARIFFS
At a macro level, there have not been too many concerns for the Indian economy. Growth in GDP promises to be closer to 6.5%. What may be lost in terms of nominal GDP is likely to be made up by lower inflation. In June 2025, CPI inflation in India touched a 77-month low of 2.10%. This is also going to raise the clamour for lowering inflation estimates, but more on that later. The big challenge that has cropped up in July and August is the decision by Trump to impose 25% tariffs on Indian exports, plus a penalty for trading with Russia.
In the current macro situation, the combination of penal tariffs could have implications for growth and inflation. The spike in tariffs is likely to hit several export-oriented sectors like textiles, chemicals, gems & jewellery, etc, which are predominant exporters to the US. Also, the tariffs would mean weak demand, and that will also hit growth. On the inflation front, it is more complex. Avoiding cheaper Russian oil would be inflationary for India. Also, higher tariffs mean a lot of imported inflation. That is the context for the August 2025 RBI policy.
RECAP OF KEY ANNOUNCEMENTS OF JUN-25 MONETARY POLICY
Here are some of the key highlights of the June 2025 policy statement.
Let us quickly turn to the key expectations from the August 2025 monetary policy.
1. WILL RBI CUT 25 BPS OR HOLD STATUS QUO IN AUGUST 2025?
This is, probably, the million-dollar question. In the previous policy in June 2025, the RBI had cut repo rates by 50 bps but had also reversed the monetary stance of the policy back from accommodative to neutral. In the MPC vote in June, while 5 members voted for a 50-bps rate cut, Saugata Bhattacharya voted for limiting it to 25 bps. However, even the Finance Ministry in a recent note had made a case for another rate cut, considering that inflation was at multi-year lows and likely to remain so. Also, from September, Indian markets will be entering the 4-month-long festive season. Historical data shows that a rate cut ahead of the festive season can have a multiplier effect on consumer demand. The broad view is that the RBI may stretch itself for one more 25-bps rate cut in August 2025.
2. WILL THE RBI CHANGE ITS REAL GDP GROWTH ESTIMATES
In the June policy, the RBI had held the real GDP growth for FY26 at 6.5%. However, there have been concerns that the impact of penal tariffs imposed by the US and the likely global demand slowdown could hit growth. That is evident in high-frequency indicators like IIP growth and core sector growth, although the GST collections continue to be robust. The RBI has a dilemma, but it is more likely to veer towards the offsetting principle. The RBI is likely to assess that while nominal growth would be hit by tariffs, the real growth may not be impacted too much due to lower inflation. Hence, 6.5% real GDP growth may be maintained.
3. WILL RBI LOWER ITS ESTIMATES FOR INFLATION?
The inflation story must be understood in the context of what has already been done to the inflation estimates. For instance, between February 2025 and June 2025, the RBI has already cut the inflation estimates by 110 bps from 4.8% to 3.7%. However, inflation had touched a 77-month low of 2.1% in June 2025. Also, the average inflation in 2025 (till June) has been 3.22%. That surely opens up the gates for another cut in inflation estimates, although it is not too clear whether the RBI would peg the inflation at 3.5% or lower for FY26.
The 3-day RBI MPC meet commenced on August 04, 2025 and will culminate in the announcement of the RBI Monetary Policy on August 06, 2025. With the penal tariffs and the need to focus more on domestic markets, there is a case for a 25-bps rate cut. Also, with the upcoming festive season, the story perfectly fits in!
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