Another 25 basis points rate cut best possible option for RBI: SBI study

In the backdrop of subdued inflation, geopolitical uncertainties, and challenges to domestic growth, India’s central bank — the Reserve Bank of India (RBI) — faces critical choices ahead of its October monetary policy meeting. A recent internal study by a leading commercial bank argues that a further 25 basis points cut in the repo rate constitutes the “best possible option” at this juncture. 

But is this prescription fully justified? This article examines the thrust of that recommendation, situates it in India’s macroeconomic context, analyzes supporting and counter arguments, and offers an evidence-based view on the optimal path forward.

The Case for a 25 Basis Points Cut: Arguments & Context

Recent Monetary Actions and the Pause

Earlier in the year, the RBI delivered cumulative rate cuts totaling 100 basis points through successive reductions, attempting to spur growth without jeopardizing price stability. Yet, in its August policy review, the central bank opted to pause, adopting a “wait-and-watch” stance to assess the transmission of earlier easing and absorb external shocks.

The study in focus positions this pause as a risk: that delaying further cuts may lead to a Type II error (i.e. failing to ease when conditions permit). The authors argue that the “bar for cut” has now risen due to prior communications, and thus any cut must be accompanied by calibrated signaling to markets.

Inflation Trends and Projections

A cornerstone of the argument for further easing is the benign inflation outlook. Consumer price inflation (CPI) is tracking at or below the lower end of the RBI’s target band (4 % ± 2 %), and with recent rationalization of the Goods and Services Tax (GST), downward pressure on general prices is expected to strengthen. Some forecasts suggest that inflation in coming quarters could ease further by 65–75 basis points, especially given the base effects and structural reforms.

This favorable price backdrop, the authors contend, gives the RBI room to ease without destabilizing inflation expectations or undermining credibility.

Growth Imperatives and External Headwinds

While inflation appears under control, the growth story is less robust. Global headwinds, notably the imposition of steep tariffs on Indian exports, threaten external demand; domestically, private investment has been sluggish, partly due to tight credit conditions and rising cost pressures. A modest rate cut can reduce borrowing costs for households and corporates, thereby kindling fresh demand and reviving investment.

Adding to the urgency, the rupee has shown signs of depreciation, and capital flows are under stress. A rate cut may also stimulate confidence, though the exchange rate channel injects an element of risk.

Communication and Market Sensitivity

The report underscores that monetary policy is not just about rates — central bank communication is a potent tool itself. Given that bond yields hardened following earlier rate cuts (post-June), any further easing must be accompanied by clear forward guidance. The study warns against muddled signals that could confuse markets or reverse gains. In their view, announcing a cut now strengthens the RBI’s repute as a forward-looking central bank.

Opposing Views & Risks

While the 25 bps cut case is compelling, there are credible counterarguments that counsel caution.

Inflationary Resurgence Risk

One of the main concerns is that benign inflation today does not guarantee its continuation. Core inflation — which excludes volatile food and fuel prices — remains a potential source of upward pressure once demand picks up. If easing is premature, the RBI may risk inflation creeping beyond the target band, unsettling expectations.

Weakening Currency and Capital Outflows

A rate cut amid a fragile external environment may exacerbate capital outflows and further weaken the rupee. With global central banks still wary of inflation, India’s interest rate differential against developed markets may shrink, reducing the attractiveness of rupee-denominated assets. Thus, the external sector constrains aggressive easing.

Transmission Lags and Banking Sector Constraints

Even when the RBI reduces the policy rate, the pass-through to bank lending rates is not instantaneous or uniform. Some banks are slow to adjust, and borrowers may not benefit immediately. The report itself points out that the cumulative 100 bps cut’s transmission has been “robust” to date, but there is always uncertainty around further rounds, especially if liquidity or structural constraints arise.

Uncertain Fiscal and External Backdrop

The central bank must also remain vigilant to fiscal slippages or external shocks. An abrupt cut might limit its ammunition if future disruptions demand further monetary stimulus. Moreover, reliance on monetary policy alone may be insufficient without complementary fiscal or export-supporting measures.

Comparative Rate Outlooks & Scenarios

To situate the RBI’s decision in a broader context, we compare alternative rate paths under plausible scenarios (e.g. cut vs. hold). The table below presents hypothetical trajectories and potential outcomes under two frameworks:

Introductory note: The following table explores two competing paths for monetary policy — (A) a modest 25 basis points cut now followed by a hold, and (B) maintaining the status quo now with room for later cuts — and their projected impacts on growth, inflation, and external stability.
 

Summary after table:

The “cut now” option offers immediate stimulus and demonstrates proactive policy, though it carries somewhat higher external risk. Holding now and delaying easing preserves flexibility, but sacrifices timeliness — which may dampen sentiment and momentum. The choice ultimately rests on the balance between upside growth potential and downside stability risk.

Additional Insights and International Comparisons

Looking beyond India, central banks in many emerging markets have recently adopted a cautious easing stance. Some have opted for staggered rate cuts rather than aggressive moves, owing to concerns about exchange rates and capital flows. This suggests that gradualism may be a pragmatic approach in fragile external conditions.

Domestically, credit growth and non-food credit offtake have been moderate, indicating underlying demand constraints. Rate cuts can only address one side of the equation; supply bottlenecks, structural reforms, and fiscal incentives will have to play complementary roles.

It is also worth considering the timing of policy adjustments relative to global developments, including the U.S. Federal Reserve’s stance. If the Fed accelerates rate cuts in the near term, India’s interest rate differential could widen in its favor. But if external rates remain sticky, India may find itself squeezed.

Recommendation & Strategic Insights

Given the evidence, a calibrated 25 basis points cut in the upcoming meeting appears justified, provided the RBI outlines strong forward guidance and maintains policy flexibility. This move would support growth momentum, especially in a subdued investment landscape, while inflation remains benign.

However, prudence is necessary. The central bank should clearly communicate that this cut is not a full pivot to aggressive easing, but a tactical adjustment grounded in current conditions. Close monitoring of inflation, exchange rate movements, and capital flows will be essential. If adverse signals emerge, the RBI must be prepared to pause or reverse course.

Additionally, monetary easing should be complemented by targeted fiscal measures — especially for export sectors facing tariff shocks — and efforts to enhance credit transmission, like reducing regulatory bottlenecks or incentivizing lending to priority sectors.

Conclusion

The argument for a 25 basis points rate cut in the upcoming RBI policy meeting is grounded in favorable inflation projections, tepid growth, and the need to sustain momentum in the economy. But this prescription is not without risk. 

The external environment, transmission lags, and inflation dynamics constrain the magnitude and timing of further easing. A modest cut now, paired with prudent communication and readiness to recalibrate, strikes a balanced path between stimulus and stability. 

The RBI must walk this tightrope carefully — acting decisively, yet flexibly — to steer India through evolving global and domestic headwinds.

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