Why RBI Didn’t Cut Rates and What It Means for the Market ?

The Reserve Bank of India (RBI) has just concluded its August 2025 monetary policy meeting. In his statement today, RBI Governor Sanjay Malhotra emphasized a clear message: stability, caution, and patience.
 

Let’s break down what was announced, and more importantly, what it means for the markets and the broader economy, along with the reasoning behind the decision.

No Change in Interest Rates

The RBI’s Monetary Policy Committee (MPC) decided to keep the repo rate unchanged at 5.50%. This is the rate at which the RBI lends money to banks, and it serves as a reference for all other interest rates in the country.

The RBI’s Stance

The Monetary Policy Committee will continue with a neutral stance, keeping policy steady to see how earlier rate cuts impact the economy.

These decisions align with the RBI’s medium-term target for Consumer Price Index Inflation of 4% (±2%), while supporting economic growth and stability. CPI Inflation measures the average change in prices of everyday goods and services.

Growth Outlook

India’s economy remains stable and resilient, due to several supporting factors:

• Rural demand is rising, with people in villages and small towns spending more, as evidenced by higher tractor and two-wheeler sales. A good monsoon and festive season are boosting farmers’ incomes and ensuring a steady food supply. Together, these factors are driving up spending across the country; this is one of the key reasons for the economy to remain strong.
• The government’s infrastructure spending is creating jobs and driving demand across sectors. At the same time, services like retail and travel are performing well, while manufacturing remains steady; all of this is helping to keep the economy stable.
• However, growth in the industrial sector has been uneven, with the electricity and mining sectors slowing down, which could affect the economy’s pace.

GDP Outlook

Overall, India’s Real GDP is expected to grow 6.5% in 2025–26, reflecting solid and balanced economic strength. Growth is likely to continue into the next year, with Q1 2026–27 projected at 6.6%.

India’s quarterly GDP growth is expected to remain strong and consistent through FY 2025–26, reflecting continued economic growth across the year.

Inflation Trends: Current Status and What to Expect

One of the most positive highlights of this policy is that Inflation fell to a 6-year low of 2.1% in June 2025, due to declining food prices, particularly in vegetables, pulses, and cereals, and good agricultural output.

Food inflation even turned negative (-0.2%) in June, something that has not been seen since early 2019. Food inflation means the rise in prices of food items like vegetables, fruits, grains, and milk over time.

However, Core inflation (which excludes food and fuel prices) has risen slightly to 4.4% in June, mainly due to higher gold prices.

CPI inflation for FY26 is projected at 3.1%, but is expected to rise to 4.9% in Q1 of FY27, indicating a potential rise in inflation in the coming months.

Why Didn’t RBI Cut Rates Again?

Despite low inflation, the RBI is taking a cautious, wait-and-watch approach, holding off on further changes.

• Current low inflation is mainly due to a good monsoon and falling food prices. However, this relief may be short-lived. If weather conditions change or fuel costs rise, prices, especially for essentials, could climb quickly. 
• While domestic economic indicators are positive, external shocks like trade tensions, changing tariffs, and oil price fluctuations can still disrupt growth and markets, thus impacting exports, inflation, and overall market confidence.
• In its latest policy, the RBI kept rates unchanged to assess the impact of the 1% cuts since February. Loans have become more attractive, benefiting borrowers, while deposit returns have slightly declined. However, the full effect on the broader economy will take time to unfold.

What does it mean for the market?

• When the repo rate stays steady, the loan EMIs (for home, car, education, etc.) are unlikely to go up or down in the short term. Borrowing costs for businesses will also remain unchanged.
• India’s steady service exports, strong remittances, and forex reserves covering over 11 months of imports give it a safety net against global uncertainties. This also makes India a relatively safe and stable market for investors in uncertain global conditions.
• Overall, the financial system is stable, with lower bad loans and stronger banks and NBFCs. This lowers the risk of financial shocks and supports economic growth.
• Urban spending and jobs aren’t as strong as in rural areas. Some sectors, like mining and electricity, are struggling. This could affect overall spending and investment confidence.
• The RBI expects inflation to rise above 4% by early next year, driven by seasonal trends and stronger demand. While prices are low now, this may not last.