With the US imposing fresh tariffs and global uncertainties rising, the Reserve Bank of India’s Monetary Policy Committee (MPC) meeting from August 4 to 6 has taken on greater importance. Many experts now believe the RBI may have more room to cut rates, especially with inflation expected to stay well below target and signs of slowing growth in the second half of the year.Speaking to CNBC-TV18’s Latha Venkatesh, a panel of top economists including Pronab Sen, former Chief Statistician; Soumya Kanti Ghosh, Group Chief Economic Advisor at SBI; Samiran Chakraborty, Chief Economist for India at Citi; Sajjid Chinoy, Head of Asia Economic Research at JPMorgan; and Sonal Varma, Chief Economist at Nomura, shared their views on the path ahead for policy rates.Samiran Chakraborty and Soumya Kanti Ghosh expect a 25 basis point rate cut in the August meeting, citing sharply lower inflation and signs of slowing economic momentum.
Varma, however, sees the RBI holding rates this time with a dovish tone, while Chinoy and Sen also favor a pause, pointing to global uncertainties and the risk of acting too early.Ghosh and Chakraborty each see room for just one more cut of 25 basis points later this year. Varma expects a total of 50 basis points in further cuts, while Chinoy suggests either no further cuts or at most one. Sen believes that when the cut comes, it should be a decisive 50 basis points move.The panel agreed that while inflation remains under control, the RBI must balance caution with action—especially amid Donald Trump’s unpredictable trade policies, weak US job data, and a potential slowdown in Indian growth later this year.These are edited excerpts of the interview.Q: The first question that you have to vote on, what will the MPC do to the repo rate on August 6.Chakraborty: We are expecting a 25 basis point repo rate cut in August.Ghosh: We are expecting a 25 basis point cut.Varma: We think the MPC will hold rates this time, but the dovish hold.Chinoy: It would be a pause.Sen: Strategically for the RBI, a pause.Q: If you include an action on August 6, how many rate cuts do you see in 2025?Chakraborty: 25 basis point.Ghosh: We are also looking at one more cut – 25 basis point only.Varma: 50 basis point more.Chinoy: I would say either zero or 25 basis points.Sen: On this again, I will go with Sonal, delay and when you do it have a 50 basis points cut.Q: We have this tariff blow and we have this very weak jobs data. We also have the most important player in the global scene literally changing the rules every night with a tweet. So at such a situation, what should the MPC be prepared in terms of global impulses?Chinoy: It is important to recognise that the global economy is at a very critical inflection point. One can look at the first half of the year and get lulled into complacency, because growth has been surprisingly strong in the first half of the year. Second quarter, global growth is tracking 2.50%, which is above trend. However, that strength is deceptive, because it has been driven by transitory factors. One of the reasons that growth has been resilient the first six months is because there has been record volumes of front loading exports to the US in anticipation of higher tariffs.We have seen lots of trans-shipment, where Chinese exports to the US have actually gone through third countries in Asia with lower tariffs. We have seen China’s policy stimulus being front loaded this year. Most importantly, the actual realised tariff rate in the US in June has been less than 10% because it takes time for the final rate to go up. So we have seen it an effective rate of only 10% whereas, given a slew of announcements made in the last 48 hours, the effective rate is going to settle somewhere closer to 18 or 20. So expect to see over the next few months a meaningful increase in the effective rate that US consumers feel.Now already, we have begun to see that below this strength on the surface that are cracks emerging. You spoke about the jobs report. What was most important is the last three months now US private hiring is only averaging 52,000 jobs per month. That’s clearly sending you a signal that US businesses are already being impacted by the uncertainty that you alluded to, and hiring has reached a stall speed. When these tariff rates go up from 10 to 18% that is going to be a substantial purchasing past week.My message is, don’t be fooled by the strength of the global economy in the first half, and the US economy in the first half. The second half is going to be a much weaker. I will end by saying; however, this means that central bank easing will be brought forward. We now expect that the Fed will most likely move in September itself. And remember, even though US inflation may go up, the rest of the world is going to be beset with more disinflation.Think of a dam where the US puts on a tariff wall like a dam, and the water that used to go to the US and now is blocked, is going to flood the rest of the world. So the Chinese excess capacity will go to other parts of the world, be disinflationary, and the fact that you have lower growth prospects, lower inflation and a weaker dollar should pave the way for central banks around the world as well to begin easing in response to the growth shock that is coming.Q: Can you path that for the Indian economy? At the moment, we have not seen very weak growth numbers in when you look at the look at some of the PMI numbers, but the tax data that came in last week, did not look too good. Tax collections have been negative on personal income tax, understandably, even corporate income tax, very, very weak. So is there more growth weakness that we should prepare for?Ghosh: Just to take it a little bit forward with the Sajjid’s argument, yes, the growth has been weak. For Indian economy, if you look into the trends as of today, it will to throw up two contrasting trends. While the first quarter GDP number which is going to be announced towards the end of August, could surprise to see a strong number. But that will be more of a statistical artefact, because what has happened is that in the last couple of months, there has been significant deceleration in prices. Therefore, that could pull down the deflector, and he could see a peculiar situation where the nominal growth and the real GDP both could converge.However, that, in essence, is not the story. We can get it very different set of numbers going forward. If you look into the momentum of the two-wheeler sales, if you look into the momentum of the electricity consumption, if you look into the momentum of the corporate reserves, if you look into the GST collections, all numbers are showing a significant deceleration trend. The important point is that in tandem with the global growth numbers, which will look better in the first half, Indian growth numbers will also look better, possibly in the first quarter, maybe a little more in the next three months, but the second half is actually going to be diametrically divergent.Therefore, in my sense, if looking into the data, we should be very clear that this would be a story of two halves. The first would be strong, but because of reasons which could be statistical artefact or otherwise, and the second half could be relatively weak compared to the first half. So looking forward, there is going to be some impact on the growth even the way things have been unfolding.Q: I did a poll, and now the new inflation number seems to be even below 3% average for the year. So does that give the Reserve Bank a clear elbowroom to cut?Varma: The balance of this, both to growth and inflation projections of the RBI, are clearly to the downside. On inflation specifically, our own projection is for a 2.8% for FY26. If we break up inflation into the food versus the core trajectory, the core underlying trends, so stripping out the impact of the commodities like gold, petrol, diesel, the underlying momentum has been around 3.50% for the last 24 months. This is the longest stretch of soft, subdued core we have seen for a while. Given the forward outlook on Chinese excess capacity or the domestic demand pressures, we do think this is going to stay benign.Now on the inflation front as well, what we are seeing is both on vegetable prices, despite the sequential increase, and on pulses, the deflation continue going forward. When we combine the overall prospects, we do think that the risk is that inflation will, in fact, undershoot the 2% the lower bound for most part of this calendar year and for the full financial year be less than 3% as you said.The final point I do want to flag is obviously from a monetary policy perspective, is the forward trajectory on inflation that is important. In addition, the one year forward inflation at a number of, let’s say 4-4.50% would suggest that we are close to target. We need to keep in mind that part of the uptick in inflation one year forward is also because of adverse base effect, and the underlying momentum is very benign. I would say the momentum is in the 3.50 to 4% range. So both the near term undershoot and the one year forward do suggest that there is space and elbow room to cut rates.Q: When the governor spoke to our channel, he kept referring to the inflation outlook, likewise, in a subsequent public discourse as well, he is worried about the inflation going forward. So Samiran that question to you. It is very clear from our poll and from what all of you are saying, inflation is going to average below 3% but should the RBI look at the current inflation or look at the year ahead inflation as Sonal is pointing out that has its own pitfalls, you tell us?Chakraborty: In a sense, the kind of summer decline in inflation has been much more than what was anticipated before, and the RBI is projection of 3.7% in the June policy needs to be lowered substantially, and we will have to see how much RBI lowers here. But the debate really is not only about the timing of the decline in inflation today versus how the inflation is going to look 9-12 months ahead, but also about what is causing this inflation to fall. So at the moment, it appears that most of the inflation fall is coming from food prices, although it’s quite broad based across cereals as well as the summer seasonal increase in vegetable prices has been much less, but it is always very unclear that how and when these shocks can come back.We have built in significant buffers in our food inflation projection for rest of the year. On the other hand, core inflation, which has been running extremely low for almost two years now, even if we assume some upside to that will probably reach somewhere around 4.50%inflation for the January-March quarter. We must also understand that the current inflation is benefiting from significant favourable base. Similarly, that January-March quarter inflation will suffer from unfavourable base. So you adjust for base, then actually inflation could be just about 4%. So the added twist in the whole issue is that we might have a new inflation series sometime early next year. So it’s becoming extremely difficult to have a projection of 9 to 12 months ahead inflation in a very reasonable way.I suspect, in the current circumstances, tracking something like an average inflation is a better idea, and RBI will have to take a call where that average inflation is going to be, and then try to calculate some sort of a real rate out of it.Q: Dr. Sen the other big question is, if you are going to cut, is it better to cut in August or in October? Is it better to wait?Sen: This is a thing, the point that Sajjid made, which is, you are seeing a huge amount of global uncertainty now in a context of that kind the question is – we don’t have much ammunition left in our belts. The question really is that, do you take action now preemptively, or do you wait to see how things pan out in the relatively near future, next couple of months. Because Mr. Trump is going to be making calls on a on a daily basis, as he has been doing the last few days. Things can change quite dramatically and therefore, now, we have just done a large rate cut in June. We should be a little cautious in terms of reacting at the moment, because there are too many uncertainties that’s being caused by Mr. Trump’s style of functioning. I would say that it is probably better to hold off a little bit because there is still time for the last rate cut to play itself out in the market.Q: What is your sense of timing, would it be better to give it earlier because you will be in time for the festive season or would it be better to postpone because there will be more pressure on the governor in October? The Fed may have cut, the July number looks like it will be 1% or something, inflation; there will be more pressure on him. So is it better to push it to October?Ghosh: A very interesting point. Our July inflation numbers are also closer to 1.2% to 1.3% it could be even lower, and the full year average now tracking at 100 basis per slower than the RBI projection. Having said that, we need to understand that ultimately, given the inflation trajectory and given that the RBI is an inflation targeting central bank, it may have to adjust the rates in a downward direction, if the forthcoming inflation numbers are an indication. However, the question is that, how do you time it, whether it is in August or in October?In my sense, a rate cut earlier than what would have happened in October could make some sense, because in every way if you look into the data right now, all data seems to be front-loaded. If you look at the global growth numbers, they are front loaded in terms of a better number, but they are not going to deteriorate going further. Indian growth numbers will be a story of two halves, good, better now, but it may not be better in the future. Even on the inflation numbers the concern in the market is that the inflation numbers over the point of time, maybe over the next year could inch up a little bit.But there is also uncertainty over here, and the new base, which will be launched next year, could be downward bias, because if the food weightage comes down and the eat and the e-commerce gets included there is every possibility that it could be a downward adjustment in the revised inflation numbers. On a lighter note, the festival season is also being front loaded this year. It is in October rather than in November and as we have seen in the past, in 2017 also when the festive season was earlier, there was a significant bump up in the personal loans. In sense that if you cut right now, there will be a scope for the banks to address the rates in the downward direction, and that would actually give ample time for transmission.So from every perspective, if all data seems to be front loaded, either good or bad, the central bank may not take the decision to cut rates.Q: There is another fear, which may be prying on the Reserve Bank’s mind, because it is an institution with a lot of history. They have already given a lot, lot of liquidity and many cuts. Dr Sen can that worry prey on their head, that if I have given so much and it will work its way over the next year, then at a time when inflation will be at 4-4.50%, you are going to have all this liquidity act, and inflation actually turns out higher. In remember, in 2010 to 2014 everything worked towards double-digit inflation, probably because you front loaded too much. What is your sense? Can that be a fear? Sen: There are two things – that can certainly be a fear. The point is, as we talked about, core inflation has been sticky for two years or longer actually, that has not been changing. So all the variations that you get are those components of the CPI which are inherently transient in nature. Now the real question is that it’s not just what the RBI feels may happen in a forward looking sense a year from today, it’s also important for the RBI to be seen to be doing something when the objective conditions of the world change.My problem is that if we front load and then something goes off the cliff later, then we may not have any other arrows in the quiver. The RBI will look toothless and it’s the image of the RBI, which the RBI can and will try to protect.Q: Let me come to liquidity, the elephant in the room. Do you expect Reserve Bank to keep call rates at the lower bound? Suppose it’s a pause, then will they keep it at five quarter and if they do cut, will they keep call at 5%?Chakraborty: Since RBI has now changed the stance from accumulative to neutral, it will be more consistent if in the neutral stance, the sanctity of the country policy operating procedure is maintained and the weighted average call rate is kept closer to the repo rate, rather than closer to the SDF. Now one way to get around this is to do the rate cut. We have been talking about that if you do the rate cut, then effectively the weighted average call rate falls down to five quarter, rather than staying at five half. So rather than doing this somewhat stealth method of keeping the rate 25 basis point lower than repo through liquidity operations, it’s probably at this juncture in a neutral stance, better do an explicit rate cut and keep the overnight rate at five quarter is what our view will be.Anyway, we will all be looking forward to that new liquidity management framework suggestions to figure out whether there is any significant change to the current operating procedure that has been suggested.Q: Sajjid do you think continued higher liquidity will be needed to help credit off take.Chinoy: There will be a temptation for that, because there’s somehow this belief in the market that when you inject a lot of durable liquidity, and banks are lending to the RBI every day, whether it’s a VRRR or in the SDF, that somehow behaviorally, that induces banks to boost credit growth, to lower deposit rates, cut lending rates and boost credit growth.Q: That is a fair expectation. It is a loss when you put it to Reserve Banks, you might as well give it to an NBFC?Chinoy: It is a fair expectation. The question is, does it stand the scrutiny of data? So we looked at this, very exhaustively for the last 10 years and what we find is that theoretically, there should be two channels in which liquidity impacts credit growth. One is the interest rate channel and Samiran alluded to that, that when you inject a lot of liquidity, you push the call money rate down to the bottom of the corridor, and that will clearly have some impact on lending rates.And I agree with Samiran, while that’s tempting to say, let me do some stealth easing in the wake of so much global uncertainty, if your stance is neutral, and there has to be sanctity to that rate, you need to move that rate back to the back to the policy rate. The question therefore, is well, what if I add more durable liquidity, keep call rates at the policy rate, will the injection of more durable liquidity increase credit growth and what we find is there is no evidence for that. It is called the credit transmission channel. We find no evidence that beyond affecting the call rate, higher quantum’s of durable liquidity either boost deposit growth or boost lending growth. So I think the incremental efficacy of that is extremely limited.Q: Very quickly, will the rupee be a worry at all. We have suddenly seen the impact of the trade issues on the rupee. Will Reserve Bank worry we can’t cut too much, rupee under tension?Varma: Should not be, obviously we need to wait for what this Russian penalty is and what that ultimately means that is something to monitor going forward. We have sufficient FX reserves to manage volatility, and importantly, inflation is below target, so any sort of imported inflationary pass through will more than be offset by the disinflation we are seeing on food and core, such that overall inflation will still undershoot, not just 4% but the new projections and potentially understood 2%. So should not be a constraint in our view.
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