- The monetary policy committee cut the repo rate by 25bp...
- ..and shifted the stance to ‘accommodative’, along our view.
- Implications for forecasts: We expect 50bp more cuts this year.
- The reciprocal tariff rate on India is in the middle of the Asia ex Japan ladder.
- Our impact study shows a modest knock-on impact on growth.
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Doves dominate: Decision and economic assessment
The monetary policy committee (MPC) voted unanimously in favour of a second successive 25bp rate cut to take the repo rate to 6%. Along our expectations, the policy stance was revised to ‘accommodative’ from ‘neutral’, signaling the bias for the rates to either stay on pause or be lowered from current levels. Governor Malhotra emphasised that the accommodative stance on policy did not reflect liquidity views, which we take to imply that call rates are likely to be close to the repo rate rather than drift into the SDF-repo corridor.
Wednesday’s cut comes against a backdrop of heightened global uncertainties led by trade tensions and volatile financial markets. Reflecting these risks and ongoing momentum in domestic indicators, GDP growth projection was trimmed by 20bp to 6.5% for FY26 (DBSf 6.5%), coupled with inflation lowered by 20bp to 4% (DBSf 4.2%) (see table for quarterly details). We are mindful of the impact of weather (e.g., heatwave) on food inflation in 2Q CY25.
The central bank maintained a cautious view on tariff developments (we discuss implications in detail in the subsequent section), pointing to a potential negative impact on the investment climate and net exports. Economic assumptions in the Monetary Policy Report for April 2025 (shown in table below), points to weaker oil prices, a weak rupee and downside risks to global growth. Growth and inflation projections for India in FY27 stands at 6.3% and 4.3% respectively, implying softer GDP impulse while inflation ticks up marginally.
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RBI’s three imperatives and policy outlook
The RBI’s three imperatives include the need to maintain an accommodative policy, alongside a conducive liquidity backdrop, whilst prioritising financial stability.
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Tariff implications
The US announced a 26% reciprocal tax on India, which is more than two and a half times of the existing average tariff gap. Markets are coming around the view that these tariffs will not only dampen activity in the exporting nations but also hurt the US outlook. US in India’s largest export market, with its share in India’s exports at around 18%, amounting to ~2.2% of GDP in FY24. The latter is amongst the smallest (see chart), containing the spillover impact on the economy. Nonetheless, there will be larger spillovers, by way of asymmetric sectoral impact and/ or though larger uncertainty for capex players as well as weak sentiments through financial markets (including negative wealth effects).
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