As expected, the Reserve Bank of India’s Monetary Policy Committee (MPC) delivered a 25 basis point repo rate cut on Wednesday, bringing the policy rate down to 6%. The MPC also changed the policy stance to ‘accommodative’ from ‘neutral’, indicating that more rate cuts are on the way.
This marks the second consecutive cut this year, a clear signal that the central bank is now squarely focused on reviving growth, with inflation largely under control. But just as the RBI looks inward to support domestic demand, fresh external headwinds are gathering force—most notably, a rapidly escalating tariff war between the United States and China.
The MPC’s decision comes as no surprise. Consumer inflation has been trending toward the RBI’s medium-term target of 4%, and economic growth, though improving, continues to fall short of its potential. India’s GDP grew 6.2% in Q3 FY25, up from 5.6% in Q2, but still remains below pre-pandemic trajectories.
Tariff war concerns
But if the domestic data provided the rationale, global developments have complicated the outlook. The GDP growth forecast for FY26 has been cut to 6.5% from6.7% earlier while retail inflation has been predicted at 4 per cent. The Governor attributed the lower growth estimate to the impact of tariff war.
In a dramatic escalation of trade tensions, the United States this week slapped a staggering 104% tariff on Chinese imports after Beijing refused to roll back its own 34% retaliatory tariffs. The move, coming just days after former President Donald Trump warned of severe consequences, could roil global supply chains and inflation expectations.
India, while not the direct target of this tariff war, could face both risks and opportunities.
On one hand, elevated tariffs on Chinese goods could drive up input costs globally, potentially stoking imported inflation in countries like India. On the other hand, Indian exporters may find new openings in the US market as competitors from China, Vietnam, and Bangladesh get priced out. But capitalizing on this window will require a swift policy response, supply-side reforms, and targeted export incentives.
A balancing act
In this context, the RBI’s decision today reflects a delicate balancing act. The rate cut offers relief to borrowers and sends a clear signal of policy support. But the central bank’s job doesn’t end with just lowering rates.
Liquidity remains tight, and the banking system is still grappling with the aftereffects of high deposit costs, subdued credit growth, and regulatory constraints. SBI Research, for instance, projects a system liquidity surplus of only around Rs 1 lakh crore by the end of FY25—far from comfortable levels. In his speech, the governor said the RBI is committed to provide sufficient liquidity.
There’s also the broader question of monetary-fiscal coordination. With the government set to borrow Rs 11.5 lakh crore in FY26, the RBI will need to keep a close watch on bond yields and market liquidity to avoid crowding out private investment. The central bank’s ongoing Open Market Operations (OMOs) and possible tweaks to the liquidity framework may help ease this pressure, but the balancing act will be tricky.
More rate cuts on the way?
Looking ahead, the room for further rate cuts remains, but the path is far from linear. Some economists expect the RBI to take a pause in June, reassess global conditions—including the fallout of the tariff war—and possibly resume easing by October if inflation remains within range. Much will also depend on how fiscal stimulus measures play out domestically and how the rupee behaves amid growing global uncertainty.
Today’s rate cut is a welcome move that reflects confidence in the macro fundamentals. But with global trade tensions on the boil and financial markets entering a volatile phase, the RBI must now move with caution.