By Swati Bhat and Dharamraj Dhutia
MUMBAI (Reuters) -India's central bank is expected to hold rates steady on Wednesday, but the odds of another cut have risen after the United States slapped steep tariffs on Indian exports last week, adding to pressure on growth even as inflation stays subdued.
A large majority of economists, or 44 of 57, in a July 18–24 Reuters poll expect the Reserve Bank of India's monetary policy committee (MPC) to hold the repo rate at 5.50% on August 6.
However, sentiment has
shifted following the tariff announcement.
"Even without that tariff announcement, a case could be made for a 25 basis point rate cut. The 25% tariff rate is an added growth shock," ANZ Research said, adding that both growth and inflation are likely to undershoot the RBI's forecasts.
The RBI delivered a larger-than-expected 50bp cut in June and shifted its stance to "neutral", signalling that further moves would depend on incoming data.
India's manufacturing sector expanded at its fastest pace in 16 months in July, with the HSBC-S&P Global PMI rising to 59.1. But business confidence fell to a three-year low, with firms citing competitive pressures and inflation concerns — a sign that underlying demand may be softening.
India's annual retail inflation slowed to a more than six-year low of 2.10% in June, near the lower end of the central bank's tolerance band, as food prices continued to ease. Inflation is seen falling to a record low in July.
"While this backdrop is conducive for further monetary easing, we believe it is not yet compelling enough to deliver a fourth straight rate cut and exhaust the policy arsenal," said Aastha Gudwani, India chief economist at Barclays.
RBI Governor Sanjay Malhotra said last month the central bank had won the battle against inflation but the war was ongoing, and future policy decisions would be guided by the outlook for growth and inflation rather than current levels.
Nomura also said the bar for an August cut is high after the June easing and stance shift, though it raised the probability of a cut to 35% from 10% earlier.
"Neither bonds nor the swaps market is pricing in a rate cut on Wednesday, and if it happens, we could actually see a rally. Currently the base case is a dovish commentary and a pause on rates," a trader at a state-run bank said.
Traders are also awaiting the announcement of a revised liquidity framework, which may come alongside the policy.
(Reporting by Swati Bhat and Dharamraj Dhutia; Editing by David Holmes)
