Repo rate review: My Bet: 'no change'

Repo Rate Review Aug 25: My take: Status quo

The bi-monthly review meeting of the Monetary Policy Committee (MPC) of Reserve Bank of India (RBI) is underway (Aug 4-6) and the RBI Governor is expected to announce the decisions of MPC on 6th August 2025.

I predict the MPC may call a 'pause' in the repo rate and also maintain the status quo in the policy stance (neutral). I do not expect any new liquidity easing measures in the short term.

Positive factors:
There cannot be a more favourable domestic condition than now to expect the 'repo reduction rate series' to continue for the fourth time in a row. Inflation for June (2.1%) is at the lower band of the inflation target rate of 4%(+or-2%). The monsoon is good so far and apparently there are no worries of any shortage in the agriculture produce to induce a supply side inflation. Crude oil prices are still around USD 65 per barrel with no indications that the price will rise due to war and 'Trump effects'. The forex reserves are comfortable and are adequate to meet one year import bills. 

Negative factors: 

I. Tariff Increase by USA:
The US announcement that the Indian goods landing in USA  will attract 25% additional tariff is a dampener, though the direct impact on the Indian economy is not likely to be material due to the following facts:

1. The total of merchandise exports of India is just 10% of the estimated GDP for FY 25.

2. 80% of the estimated Indian GDP comes from the domestic side and 10% of the GDP are accounted by service exports.

3. The total trade (exports plus imports) with USA at USD 131 billion (app) is just 3% of the estimated  Indian GDP for FY 25.

4. One of our main exports to the US viz pharmaceuticals cannot be easily replaced as USFDA clearance is required for the new entrants to step in, which normally exceeds one year.

The above are comforting factors, but the increase in tariffs on goods exported from India to USA is likely to have an adverse impact on the stability of the Indian Rupee versus USD and on the forex inflows through FDI/FPI routes, in the short term. The tariff increase may reduce export revenues from USA (our total costs to the US importer becoming expensive), instability of the Indian rupee may push the  import costs and the lesser forex inflows may affect the private investment in sectors of importance to boost the economy.

II. Declining NIM and the likely decline in deposit growth in banks: While most of the banks are still making improvements in the net profits and GNPA levels, a few large and mid sized banks have reported (a) notable decline in the net profit and (b) a visible stress in their advances portfolio. The entire banking system reported a reduction in NIM, even as they partly transmitted the reduction in the repo rate (of 100 bps in the last six months) to their lending and deposit rates. There are reports that the reduction in deposit rates has already resulted in most of the bank customers diverting a part of their bank deposits to mutual funds. If the banks have to protect their NIM and also attempt to see a growth in their deposits, they may as well decide to not to pass on any further reduction in the repo rate. It is worthwhile here to note that the reduction in the repo rate resulted in immediate transmission in money market instruments, which is not the case in respect of bank lending rates.

III. RBI Governor Statements: The governor indicated a pause, when he made three statements as under: 

(I) the policy stance is an indicator of how the repo rate will move in future and it has nothing to do with the liquidity in the system.

(ii) 'accommodative' stance is changed to 'neutral' in June 25 to give the MPC the flexibility to decide the rate based on market realities and

(iii) the reduction in repo rate by 50 bps in June 25 is 'front loaded', implying that a 'pause' may be the course of action, at least for the next meeting.

Summary:
I therefore expect the MPC of RBI to keep  the repo rate unchanged.

Regarding the monetary policy stance, I believe, status quo will continue.

As the liquidity in the banking system is as strong as before (Rs.2.86 lac cr. as on July 31, 2025) and the conduct of VRRR is yet to be fully subscribed(Rs.1.71 lac cr. subscribed to by the banks, against the notified auction of Rs.2 lac cr., at 1 bp less than the repo rate of 5.50%) I do not expect any reduction in the CRR for now. On the other hand, I may not be surprised, if RBI increases the difference between the repo rate and standing deposit facility rate (SDF)* from the present 25 bps to 40-50 bps

Regards

V. Viswanathan
CGM Retd. e-SBT

5th August 2025.

 *fixed reverse repo rate at 3.35%, though mentioned in policy rate, is not activated by RBI and the banks park their surplus in SDF only

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