'Worried' RBI cuts repo rates to boost growth as Trump reciprocal tariffs take effect

The Reserve Bank of India on Wednesdsay cut its key repo rate by 25 basis points to 6% – a second consecutive time to boost the sluggish economy, which is facing further pressure from US tariffs.

The RBI Monetary Policy Committee (MPC) started reducing rates with a quarter-point reduction in February, its first cut since May 2020.

The new US tariffs on India threaten the central bank's GDP growth estimate of 6.7% for 2025-26 and the government's economic survey forecast of 6.3%-6.8%.

The RBI's six-member monetary policy committee, headed by Governor Sanjay Malhotra, voted unanimously to lower the repurchase rate by 25 basis points to 6%.

The MPC also shifted its policy stance to “accommodative” from “neutral", which means it’s considering more rate cuts in coming months.

“Going forward, absent any shocks, the MPC is considering only two options: status quo or rate cut,” Malhotra said in a televised speech on Wednesday from Mumbai.

“The domestic growth-inflation trajectory demands monetary policy to be growth-supportive, while being watchful on the inflation front,” he said.

Donald Trump's reciprocal tariffs kick in

RBI’s decision comes less than an hour after Donald Trump's so-called reciprocal tariffs kicked in, dealing a thunderous blow to the world economy. In his speech, Sanjay Malhotra acknowledged the impact of disruptions in global trade on growth.

“The recent trade, tariff-related measures have exacerbated uncertainties clouding the economic outlook across regions, posing new headwinds for global growth and inflation,” he said.

By cutting rates for two straight policy meetings, Malhotra has signalled that the central bank intends to support a slowing economy. India expanded 6.5% in the past fiscal year, its weakest pace since the pandemic, and economists predict a 20-40 basis point growth drag due to tariffs this year.

RBI lowers GDP projection

The RBI chief also lowered the growth outlook for the year that started on April 1 to 6.5% from 6.7% earlier. He pegged inflation at 4% compared to a previous forecast of 4.2%.

“The combination of downgrades to its GDP growth and inflation projections and the change in stance to accommodative all reinforce that this is a dovish cut,” said Sonal Varma, an economist at Nomura Holding Inc.

Economists said that deeper cuts are on the cards to further shield the South Asian economy. “We see scope for additional 75-100 basis points of rate cuts in the year ahead depending on the scale of global slowdown,” said Upasna Bhardwaj, an economist at Kotak Mahindra Bank Ltd. Varma also expects the easing cycle to continue with quarter-point cuts each in June and August policy meetings.

Tariff war: RBI more worried about its impact on growth than inflation

Sanjay Malhotra said he is more worried about its impact on growth than inflation.

As far as the impact of US tariffs on India, he said, "We have given our assessment as you can see, the growth rate, we have reduced by 20 basis points this year, primarily arising out of uncertainties."

On the inflation front, he said, “it can actually move both ways, because of the surplus, because of the demand that is going to shrink as a result of the trade tariff friction. It may help on the inflation front”.

Besides, he said, crude prices have also gone down.

The RBI, however, lowered the retail inflation estimate to 4 per cent, 20 basis points lower than the previous estimate for the current financial year.

(With inputs from Bloomberg and PTI)