Will Monsoon Showers Help Cool Inflation? RBI May Wait For Clarity Before Cutting Rates Again, Say Analysts

As the Reserve Bank of India (RBI) prepares for its upcoming Monetary Policy Committee (MPC) meeting in August, investors are closely evaluating whether a fourth repo rate cut is on the cards.

The central bank has already slashed rates by a cumulative 100 basis points (bps) in 2025, 25 bps each in February and April, and an unexpected 50 bps cut in June, bringing the repo rate down to 5.5 per cent. Further, after shifting its policy stance from 'accommodative' to 'neutral' in its June MPC meet, the RBI signalled a more cautious approach going forward. This led many analysts to think that the central bank might not cut rates again anytime soon.

However, a sharp moderation in inflation in the month of June has revived hopes for another rate cut.

Easing Inflation Revives Rate Cut Hopes

In June, the Consumer Price Index (CPI)-based inflation shrinked to 2.10 per cent, much lower than the RBI's current estimates of 3.7 per cent for the full financial year (FY26). The cooling in inflation was mainly a result of declining food costs due to a favourable monsoon so far this year.

A good monsoon season improves agricultural output, which increases the supply of food items and helps bring down costs. As food prices come down, overall food inflation also declines. This drop in inflation often gives the RBI more room to cut interest rates, making loans and credit more affordable. Lower borrowing costs, in turn, encourage households and businesses to spend and invest more, which boosts demand in the economy.

India is experiencing one of its wettest monsoons seasons this year in over a century. According to the India Meteorological Department (IMD), the monthly average rainfall over the country as a whole in July 2025 is most likely to be above normal, exceeding 106 per cent of the Long Period Average (LPA). The LPA of rainfall over the country as a whole during July, based on data from 1971-2020, is about 280.4 mm. Geographically, IMD says that most parts of the country are likely to experience rainfall that is normal to above-normal.

Will RBI Continue Its Rate-Cutting Cycle

According to Namrata Mittal, Chief Economist, SBI Mutual Fund, the real policy rate is still high, even after a total 100 bps cut. She says, "In our assessment, while the RBI's proactive approach to managing liquidity is encouraging, RBI has been highly calibrated on rate cuts. We suspect that growth in FY26 would underwhelm expectations. Despite a cumulative 100 basis points of easing, the real policy rate remains elevated. The RBI has shifted its stance to neutral at a time when the economy is receiving little support from fiscal stimulus or export momentum. In this context, further rate cuts are still in the cards."

Mittal suggests that the RBI could take a wait-and-watch approach in August after its aggressive rate cut in June.

She adds, "Increasingly, market is worrying on lack of demand for credit. We think that by September, the distribution of monsoon and its consequent impact on food inflation would be somewhat clear. Hence, we would still be pencilling additional 50bps of rate cut in FY26 post the Kharif season. It is worth recalling that in both the 2015 and 2019 easing cycles, credit growth remained subdued despite ample liquidity, largely because the magnitude of rate cuts was modest."

Shriram Ramanathan, CIO – Fixed Income at HSBC Mutual Fund, too, believes the sharper-than-expected drop in June inflation has strengthened the case for another rate cut.

However, he says, "The MPC would likely prefer to wait for the pass through of the front loaded cuts effected so far into the banking system, while also keeping a keen eye on global market developments and potential volatility resulting from them."

Ramanathan expects the MPC to go for one last 25 bps rate cut between October and December, which would likely mark the end of this easing cycle.