India’s central bank has cut interest rates for the second time this year to boost a slowing economy braced for the damaging fallout of newly imposed US tariffs.
The Reserve Bank lowered its repo rate from 6.25 per cent to 6 per cent, aiming to spur lending and investment amid rising global trade tensions.
The bank also revised down its economic growth forecast, estimating GDP to expand by 6.5 per cent as against its previous projection of 6.7 per cent, citing a weaker economic outlook. It expected GDP to grow at 6.5 per cent next year as well.
The bank said inflation was estimated to ease to 4 per cent, down from 4.2 per cent, giving it more room to cut rates to support the economy.
Central bank governor Sanjay Malhotra said the 26 per cent tariff imposed by US president Donald Trump on imports from India had exacerbated uncertainties but quantifying the impact on growth was difficult.
“Growth is improving after a weak performance in the first half of the financial year 2024-25, although it still remains lower than what we aspire for," Mr Malhotra said in a televised speech on Wednesday.
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The bank’s monetary policy committee shifted its stance to “accommodative” from “neutral”, meaning it was considering further rate cuts. “Going forward, absent any shocks, the MPC is considering only two options: status quo or rate cut,” he said, referring to the panel. “The domestic growth-inflation trajectory demands monetary policy to be growth-supportive while being watchful on the inflation front.”
India, Asia’s third-largest economy, is the latest country to cut interest rates in the wake of the Trump tariffs. The Reserve Bank of New Zealand earlier announced a rate cut, signalling wider efforts by policymakers to soften the blow of the near-worldwide tariffs.
Mr Trump’s tariff war has raised fears of a US recession and a global slowdown, leaving emerging market central banks facing a tough choice between cutting rates to support growth and shoring up their fragile currencies.
Mr Trump has imposed an additional tariff of up to 26 per cent on Indian goods. Although a steep levy, it is lower than the total 104 per cent tariff on China, 49 per cent on Cambodia, and 46 per cent on Vietnam.
Beijing has retaliated with a 34 per cent tariff on American goods, among other measures, and vowed to “fight to the end” after Mr Trump threatened further levies, escalating a trade war between the world’s two largest economies.
In contrast to China’s combative response, India has responded cautiously, lowering import levies after Mr Trump’s complaints.
Foreign minister S Jaishankar said India had “agreed on the importance of the early conclusion of the Bilateral Trade Agreement" with the US.
Less than an hour after the tariffs kicked in on Wednesday, the Reserve Bank of India’s monetary policy panel voted to cut the repo rate and change the policy stance.
Indian economists estimate that higher tariffs could shave 20 to 40 basis points off growth in the world’s fifth-largest economy this fiscal year, due to both direct and indirect impacts.
"We see growth undershooting the RBI's estimates and expect it at 6.3 per cent for the fiscal year 2026," Sakshi Gupta, principal economist at HDFC Bank, said.
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