India’s central bank has decreased interest rates by 0.25% amidst a wave of downgrades in growth forecasts following Donald Trump’s tariff declarations.
The Reserve Bank of India (RBI) has lowered the repo rate from 6.25% to 6%, marking the second reduction since February when rates were cut after almost five years.
The repo rate represents the rate at which the central bank lends to commercial banks, thereby affecting borrowing expenses.
Additionally, the RBI has revised its growth forecast for this year down from 6.7% to 6.5%. It anticipates that India’s gross domestic product (GDP) will also grow at 6.5% next year.
Importantly, the RBI has adjusted its monetary policy stance from “neutral” to “accommodative”, indicating a greater willingness to further reduce rates in order to stimulate a slowing economy.
“Concerns regarding trade tensions are becoming a reality,” RBI governor Sanjay Malhotra stated in his address, noting that obstacles to trade will continue to challenge the economy.
Most economists, previously anticipating just one additional rate cut this year, are now forecasting further reductions as Trump’s tariff conflict jeopardizes growth in the world’s fastest growing major economy.
According to ICICI Bank, “The extent of rate cuts in the current cycle could reach as high as 100bps (1%),” a perspective shared by numerous analysts.
Diminishing inflation will provide the RBI with more flexibility to lower borrowing costs, suggest various brokerage firms, as growth momentum continues to decelerate due to Trump’s global trade policies.
HSBC estimates that India’s GDP could experience a direct hit of up to half a percent this financial year due to declining export volumes globally and reduced foreign fund inflows.
The government’s ability to stimulate the economy and mitigate the effects of Trump’s tariffs is also constrained, as “spending and tax revenues have weakened in recent months,” according to HSBC.
Beginning Wednesday, Indian goods exported to the US will encounter additional tariffs of as much as 27%.
Tariffs on India are comparatively lower than the 104% imposed on China and 46% and 49% on Vietnam and Cambodia, respectively.
The overall impact on India’s trade will hinge on “the duration of the newly announced tariff structure,” stated ratings agency Crisil. “The outcome will also depend on how other nations respond or negotiate with the US concerning tariffs.”
China has already retaliated by enforcing a 34% reciprocal tax on US imports, while Europe is contemplating counter-measures.
Conversely, India has adopted a more measured approach and is striving to finalize a trade agreement with the US.
India has underscored “the significance of rapidly concluding the Bilateral Trade Agreement,” Foreign Minister S Jaishankar tweeted this week following his discussions with US Secretary of State Marco Rubio.
However, even with a trade deal established, India’s economy may still be vulnerable to a global slowdown, which could diminish demand for its exports if worldwide growth falters significantly.
Wall Street bank JP Morgan estimates the probability of a global recession at 60%, while ratings agency Moody’s has raised the likelihood from 15% to 35% due to tariffs.
At 6.5%, India remains the world’s fastest growing major economy; however, its growth has sharply decreased from the 9.2% peak recorded in the financial year 2023-24.
