Global Uncertainty from US Tariffs: Mixed Implications for India
The reimposition of tariffs by the United States under the Trump administration has intensified fears of a global trade slowdown. Earlier in January 2025, the World Bank revised its global GDP growth forecast downward to 2.7% for both 2025 and 2026 in its Global Economic Prospects report. The revision was driven by escalating trade restrictions, persistent inflationary pressures, and tightening financial conditions worldwide.
In this backdrop, the Reserve Bank of India (RBI) revised India’s GDP growth projection for FY2026 to 6.5%, down from earlier estimates, acknowledging the potential impact of weakening global demand and deteriorating investor sentiment. While external challenges persist, India remains comparatively resilient, underpinned by strong domestic consumption - accounting for nearly 60% of GDP - and a vibrant services sector.
That said, the country is not immune to headwinds. Merchandise exports have contracted for five straight months through March 2025, and sectors such as steel, chemicals, and consumer goods face growing dumping risks from surplus-exporting nations, signaling rising pressure on Indian manufacturers.
RBI’s Successive Rate Cuts Since February 2025: Navigating Global Risks with Policy Agility
Amid a favorable domestic macro backdrop, the RBI has taken a proactive and data-driven approach to monetary easing. Headline CPI inflation moderated to 3.61% in February 2025, its first sub-4% print in six months, thanks to a significant drop in food inflation and stable core inflation. Crude oil prices remaining below $83/barrel and efficient domestic supply chains have also helped keep imported inflation contained.
Responding to this benign inflationary environment, the need to stimulate domestic demand, and heightened global risks, the RBI has reduced the repo rate in successive Monetary Policy Committee (MPC) meetings since February, bringing it down to 6.00% as of April 2025. Simultaneously, it shifted its policy stance from neutral to accommodative, signaling its strong intent to prioritize growth without compromising macro stability.
These rate reductions are not merely reactive; they represent a strategic recalibration rooted in improving fundamentals. The RBI’s easing is intended to reinforce business confidence, lower borrowing costs, and create conditions conducive to a broader investment recovery.
Additionally, the domestic liquidity position has strengthened considerably—from a ₹3.3 trillion deficit in January to a ₹894 billion surplus in March 2025—aided by targeted Open Market Operations (OMOs). This liquidity shift is expected to enhance monetary transmission, making it more likely that banks will pass on lower rates to end consumers via cheaper EMIs and credit.
Looking ahead, a strong rabi harvest, expectations of a normal monsoon, and persistently low inflation provide RBI with continued policy space. Should global trade risks persist or domestic growth falter, further rate cuts in FY2026 are plausible, potentially bringing the repo rate below 6.00%.
Navigating Currency Pressures Amid Diverging Global Rate Cycles
While India leans into monetary easing, the US Federal Reserve is constrained by concerns over imported inflation and may delay its rate cuts. This divergence in policy trajectories could lead to widening interest rate differentials, putting pressure on the Indian Rupee (INR).
In such a scenario, the INR may face a depreciation risk. However, India’s strong forex reserves— standing at approximately $676 billion—serve as a critical buffer. These reserves provide the RBI with substantial capacity to intervene in currency markets, manage volatility, and maintain external stability, even as global central banks diverge in policy direction.