India central bank cuts rates : ‘accommodative’ approach shifts as US tariffs increase growth worries
India central bank
India central bank : Reuters, Mumbai, April 9 In an effort to stimulate the faltering economy in the face of new U.S. tariffs, the Reserve Bank of India (RBI) dropped its benchmark repo rate on Wednesday for the second time in a row and altered its monetary policy stance, indicating room for additional cuts in the future.
After the Reserve Bank of New Zealand, India became the second central bank to lower interest rates following the announcement of the extensive trade taxes.
In addition to causing financial instability, the tariffs have increased the likelihood of a global slowdown and a U.S. recession, forcing emerging market central banks to make the difficult decision of either strengthening their weak currencies or lowering interest rates to promote growth.(India central bank)
As anticipated, India’s Monetary Policy Committee (MPC), which is composed of three RBI and three outside members, lowered the repo rate (INREPO=ECI) by 25 basis points to 6.00%. In February, it made its first rate drop since May 2020, lowering rates by a quarter percent.
Additionally, the central bank shifted from a “neutral” to a “accommodative” position.
According to Malhotra, “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,” and the outlook for inflation is benign.
The decision to lower the repo rate and alter the policy stance was approved by all six MPC members.
He stated that the shift in stance does not directly relate to liquidity concerns and that the MPC is now only contemplating two options: a rate cut or the status quo.(India central bank)
“More rate cuts are likely,” Shilan Shah, deputy chief emerging markets economist at Capital Economics, stated, “with inflation appearing contained and uncertainty surrounding U.S. trade policy set to rumble on.”
“We think the repo rate will drop to 5.50% this year,” Shah said in a note.
ANZ Research also expects two more rate cuts and sees these by August 2025.
Cut Growth And Inflation Forecasts :
The RBI’s previous growth projection of 6.7% has been marginally lowered to 6.5%. Inflation is now 4% as opposed to 4.2% previously.
According to the committee’s written statement, “the benign inflation and moderate growth outlook demands that the MPC continues to support growth in such challenging global economic conditions.”
Following the announcement, India’s benchmark 10-year bond rate dropped slightly to 6.50% from 6.51%, but the rupee barely moved, remaining at 86.57. The main equity indexes were down about 0.6% apiece, continuing their losses.
(India central bank)
Economists predicted that the direct and indirect effects of higher tariffs might reduce growth in the fifth-largest economy in the world by 20–40 basis points during the current fiscal year.
Sakshi Gupta, principal economist of HDFC Bank, stated, “We see growth undershooting the RBI’s estimates and expect it at 6.3% for the fiscal year 2026.”(India central bank)
RUPEE Weakness :
The central bank warned that the possibility of currency wars and growing trade protectionism could further strain the rupee in a monetary policy paper that went along with it.
According to the research, inflation may increase by about 35 basis points if the rupee depreciates by 5% from its current assumption of 86 to the US dollar. However, GDP growth could gain by about 25 basis points through the trade channel as exports would become more competitive.(India central bank)
“Excess volatility” will remain the focus of the central bank’s currency management strategy, Malhotra stated. He stated that although the RBI “will not shy from intervening if there is excess volatility,” it does not have a target level for the currency.
Since the announcement of the U.S. reciprocal tariffs, the rupee has dropped 1.2%, mostly matching losses in key Asian rivals. On February 10, it fell to a record low of 87.95.
