​Time for action: On the RBI pausing rate cuts

The Reserve Bank of India’s (RBI) Monetary Policy Committee was sensible to pause its rate cuts, as announced on Wednesday (August 6, 2025). RBI Governor Sanjay Malhotra rightly pointed out that the uncertainties surrounding tariffs are still evolving, and that the 100 bps of rate cuts implemented since February 2025 are still percolating through the system. Mr. Malhotra’s statement was made before U.S. President Donald Trump approved an additional 25% tariff on imports from India, over and above the existing 25% reciprocal tariffs. However, his assessment that the matter is far from over was nevertheless accurate. India is still in the process of negotiating a Bilateral Trade Agreement with the U.S., and the final tariffs are far from decided. In the meantime, Mr. Trump has already indicated that similar additional tariffs — “penalties” for buying oil from Russia — may be imposed on other countries as well, which will impact India’s comparative advantage. Leaving room for another rate cut later in the year when things might be clearer, thus, was the sensible thing to do. The other broad reason why the pause makes sense is that it allows the RBI to see whether such monetary measures are working. A 100 bps cumulative cut in rates over the last six months is significant, and the banking system needs time to pass that on to borrowers. The Governor also pointed out that there is ample liquidity in the system, which means the banks have the money to lend.

The question, however, is whether there is enough growth-related borrowing happening. RBI data show that, as of end-June, loans to purchase consumer durables had contracted about 3% compared to the previous year. Growth in housing loans slowed sharply to 9.6% from 36% a year earlier, while vehicle loans too slowed by five percentage points over the last year. In line with this subdued demand outlook, companies too seem to be slowing their borrowing. Loans to industry grew 5.5% in June 2025, down from 8.1% in June last year. Simply reducing rates, therefore, is not enough and that is something the Governor alluded to when he said stronger policy frameworks “across domains, and not just limited to monetary policy”, would be pivotal in achieving India’s growth potential. The government has to intervene in a more focused manner than just increasing capital expenditure across the board. A lot can be done through tax. The Goods and Services Tax rate rationalisation, that was promised several times, is long overdue. A reduction in fuel prices in line with lower oil prices, too, will lift consumer sentiment. The RBI can, for the moment, afford to wait things out. The government does not have this luxury.