RBI plays safe with policy pause; markets mixed as rate path stays cloudy

According to Sandeep Yadav, Head - Fixed Income, DSP Mutual Fund, the August MPC echoed the same tone as the last one. “Governor Malhotra now resembles Gov Das in keeping cards close, using selective data, and avoiding clear commitments.”

Inflation Ambiguity

RBI cut Q3FY26 CPI forecast from 3.9% to 3.1% but kept Q4 at 4.4%—implying a sudden Jan–Mar spike. If such foresight exists, why not disclose the reason? Inflation a year ahead is pegged at 4.9%, but even if it comes lower, lets say at 2%, RBI could still push cuts forward citing future “base effect.” RBI's CPI forecasts have fallen sharply (FY26 from 3.7% to 3.1%) but RBI downplayed the change—reinforcing our view that inflation is just a pretext for decisions.

On CPI composition, RBI claimed food inflation is immune to imports, but also cited high core CPI as an MPC input. Swap these arguments and the conclusion flips—showing selective narrative.

Growth Ambiguity

FY26 GDP target stays at 6.5% (since Feb 2025 policy) with “evenly balanced” risks — despite worsening tariffs, weak IT, soft quarterly results, and RBI’s own acknowledgement of mixed high-frequency data. At the very least, risks should’ve been “unevenly balanced.”

No mention of rupee concerns is expected, since admitting them could fuel speculation — though RBI sold USD 9b in July final week.

Market Take

No rate cut and no dovish tone disappointed markets, which had positioned bullishly. We disagree with the market view that this marks the end of the yield cycle; soft incoming data could still force larger delayed RBI moves later, just as under Gov Das in 2024.

According to Rajiv Sabharwal, MD and CEO, Tata Capital Ltd, RBI’s decision to maintain the repo rate at 5.50%, after three successive rate cuts earlier this year, reflects a poised and forward-looking approach to managing evolving macroeconomic conditions.

“With the policy stance remaining neutral, and both the Standing Deposit Facility (SDF) and Marginal Standing Facility (MSF) rates held steady at 5.25% and 5.75% respectively, the central bank has opted for stability while continuing to prioritise durable growth and anchoring inflation expectations,” he said.

A rate cut in upcoming meetings remains a possibility, which could further strengthen confidence in India’s resilient macroeconomic fundamentals, he said.

“The move would also signal policy continuity amid external uncertainties, such as the impact of global tariff developments. The economic growth outlook remains robust, supported by steady performance in the services sector,” he added.

In the light RBI’s decision on Wednesday, Vijay Kuppa, Director, Bidd noted that the FD and bond rates may not fall further significantly in the near term, but the risk is clearly downward.

Banks may still pass on earlier rate cuts over the next few months.

“This could be the final window to lock in high yields, whether in fixed deposits or high-rated bonds. Investors should remain diversified, especially with volatility expected to rise due to global trade tremors and election-led uncertainties,” he added.

For borrowers, the pause may delay further EMI reductions, but the cumulative 100 bps cut this year still offers relief. For markets, the stance remains “Neutral”, meaning future moves will depend on how Trump’s tariff talk evolves and whether domestic demand shows signs of softening or overheating.

This is a classic RBI tightrope walk: waiting, watching, and keeping some powder dry.

Reacting to MPC’s decision to maintain status quo on rates and stance Vinod Francis, General Manager, Chief Financial Officer, South Indian Bank said the move was not surprising since it is the right policy decision to ensure price stability in the wake of external headwinds including the proposed 25% levy on exports by the US.

“Also, it is pretty evident that RBI is leaving no stones unturned to ensure price stability though inflation is cooling and projected to be below apex bank’s upper threshold limit. It is also prudent for MPC to wait for the rate transmission to take effect fully before any further cuts,” he added.

Anurag Mittal, Head of Fixed Income at UTI AMC, noted that RBI is just working subtly through liquidity management.

“RBI's bias remains towards accommodation, and the policy pause reflects focus on transmission of earlier rate cuts. The Q1FY27 CPI forecast of 4.9% required anchoring inflation expectations. Elevated real rates and a stable "lower for longer" policy backdrop should support intermediate duration where we expect relative outperformance,” he said.

Vishal Goenka, Co-Founder of IndiaBonds.com said RBI was expected to keep repo rates unchanged at policy meeting in face of uncertainty due to tariffs.

“With inflation expectations down to 3.1% and growth same at 6.5%, they have created optionality for now. Next direction of rates would be led by any fallouts from tariff and US direction in Fed’s meeting in September,” he said.

“With front loading and 100bps rate cuts already, continue to see long end rates come under pressure for now. Interestingly RBI acknowledged that large corporates have been agile to fund from bond markets given the slower transmission of rate cuts. We continue to see robust growth of corporate bond markets this year both from supply and demand side,” he added.

Umesh Sharma, CIO Debt, The Wealth Company Mutual Fund said that a section of the market was hoping for a dovish shift or even a 25-bps rate cut, especially amid falling headline inflation and rising expectations of rate cuts by the U.S. Federal Reserve later this year.

The MPC, however, chose to stay on hold, pushing bond yields up by 4–7 basis points across the curve.

“Looking ahead, the MPC appears poised for a prolonged pause, though a 25-bps cut toward the year-end remains possible. Investors can stay engaged in moderate-duration fixed income strategies and selectively explore long-end opportunities based on risk appetite,” he added.

Reacting to the RBI's decision to maintain the repo rate at 5.50%, following a 1% reduction earlier this year, Mahesh Agarwal, Managing Director, Purti Realty said the move should be viewed as a favourable action.

"For homebuyers, this indicates that affordability remains unchanged—EMIs won't be affected at the moment, but previous rate reductions have already contributed to reduced expenses," he opined, adding that this has helped maintain buyer interest consistently.

Developers are optimistic because of previous rate reductions as banks relay the benefits to the customers, he said.

"In general, the real estate market is anticipated to remain stable, with the possibility of enhancement if rates are reduced again in the near future. Had the rate been reduced further then it would have provided more benefits to the home buyers,” he added.