RBI turns dovish amid tariff uncertainty

At its meeting ending on 09 April, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) voted unanimously to reduce the policy repo rate from 6.25% to 6.00%. The decision marked the second consecutive interest rate cut and the logic behind the decision was broadly the same as in February.¹

The RBI has a mandate to maintain price stability while keeping in mind the objective of growth. Since the MPC’s last meeting, inflation has continued to moderate and has now been within the 4% ±2% target range since November 2024 (see Chart 1). The MPC believes the outlook for prices has become more favourable and views risks to that outlook as balanced.²
 

Chart 1. India Consumer Price Index inflation and RBI inflation forecasts (% change, year-on-year)

Source: Reserve Bank of India, LSEG Data & Analytics and EFGAM calculations. Data as at 10 April 2025.

The improved inflation outlook has created headroom for the RBI to shift its focus to the growth element of its mandate. India’s central bank sees a positive demand outlook, particularly supported by government spending following the Union Budget 2025-26 which allocated a 17.4% increase in the central government’s effective capital expenditure. 

However, it is notable that the GDP growth projection for fiscal year 2025-26 was revised down from 6.7% to 6.5%. According to RBI Governor Sanjay Malhotra, this revision essentially reflects the impact of global trade and policy uncertainties. 

This was particularly interesting given the RBI is one of the first central banks to attempt to quantify the impact of Trump’s recent tariff policies. When the MPC met, the US planned to levy a 27% tariff on imports of goods from India. Since the meeting, Trump announced a suspension to the additional tariff for 90 days and that a lower baseline rate of 10% would be applied instead during this period. 

The volatility of Trump’s recent trade policy announcements aligned with the overarching theme of Malhotra’s speech, which was that the impact is extremely difficult to quantify at this juncture in time. There are several unknowns remaining. Not only are the elasticities of India’s export and import demand uncertain, but so too is the final policy that will be enacted by the Trump administration given India’s government is proposing a trade agreement with the US.³

Nonetheless, the MPC felt that there was enough evidence to suggest that the totality of Trump’s policies, and the higher level of global uncertainty, will be negative for growth. The headroom provided by the positive inflation outlook in India allowed the RBI to cut rates to support economic activity.

More striking than the rate cut was the RBI’s decision to change its policy stance from neutral to accommodative. The MPC votes on a policy stance at each meeting, with possible stances including “accommodative”, “neutral” and “withdrawal of accommodation”. The shift represents forward guidance that the MPC expects to cut rates further in its upcoming meetings due to its belief that “global trade and policy uncertainties shall impede growth”.
 

¹ https://www.efginternational.com/uk/insights/2025/rbi_cuts_rates_for_first_time_since_may_2020.html
² https://website.rbi.org.in/web/rbi/-/press-releases/monetary-policy-statement-2025-26-resolution-of-the-monetary-policy-committee-april-7-to-9-2025
³ Export and import elasticities refer to how much a country’s exports or imports change relative to a change in price.