With US President Donald Trump imposing a sweeping 26 per cent reciprocal tariff on India even as negotiations on a bilateral trade agreement is ongoing, economists said that a 25 bps cut in repo rate is expected this April by the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC). During the previous meeting, the central bank had announced a 25 bps cut in the key interest rate to 6.25 per cent from the earlier 6.50 per cent. The RBI had maintained a ‘neutral’ stance.
A higher-than-expected tariff calls for a further rate cut
“On monetary policy, we expect the RBI to cut rates by 25bps and also anticipate that on the back of an uncertain external demand environment, the RBI will change its stance to accommodative in the policy review on April 9th. Further, on the back of downside risks to growth we see risk of a deeper rate easing cycle, with additional rate cuts of 50-75ps (vs base case of 75bps rate cut) as the RBI will likely need to support domestic demand,” an analysis report by Moran Stanley stated. It further maintained that in case of pronounce downside risks to growth, policy makers are expected to pause fiscal consolidation and increase capex spending to support domestic demand.
In fact, per Barclays, the higher tariffs announced by Donald Trump on imports from India has reinforced its view of three more cuts from the RBI, to a terminal rate of 5.50 per cent. “India’s domestic orientation may offset some of the pressure from large reciprocal tariffs, while the possibility of a bilateral trade agreement suggests tariffs may eventually be reduced for the economy. However, ultimately weaker global growth and the downside effects of US tariffs on exports – even if temporary – suggest the RBI will likely remain on an easing track. Growth and inflation outcomes being lower than the RBI’s estimated trajectory mean a rate cut at the meeting next week is likely a done deal,” Barclays said.
This is despite the tariff imposed on Indiabeing lower than other Asian countries such as China (34 per cent), Vietnam (46 per cent), Thailand (37 per cent), Bangladesh (37 per cent), Taiwan (32 per cent), etc.
During the previous MPC meet, the central bank had projected GDP growth for FY26 at 6.70 per cent, economists opined that the higher US tariffs has posed downside risk to India’s growth forecasts to the tune of 30- 50bp. Aditi Nayar, Chief Economist, Head – Research & Outreach, ICRA Limited, said, “In our view, this poses a mild downside risk to our growth forecast. However, we suspect that the relative tariff scenario is going to continue to evolve as the year progresses. For now, we are maintaining our baseline GDP growth forecast of 6.5 per cent for FY2026. As a result, we continue to expect the MPC to reduce the repo rate by 25 bps next week, based on the expectation of a moderation in the CPI inflation to 4.2 per cent on average in FY2026. A final rate cut of 25 bps may be forthcoming in the June or August 2025 policy review, based on the evolving growth inflation dynamics.”
Radhika Rao, Executive Director and Senior Economist, DBS Bank, also added, “We look for a 25bp cut in the repo rate to 6 per cent along with a change in stance to accommodative at the April meeting, tapping into the wide real rate cushion. Policy guidance will be important as markets price in the possibility of at least two rate cuts in the coming months. While confident on domestic developments, the MPC is likely to be guarded on the uncertain global backdrop as trade distortions pose stagflationary risks to the US and raise the risk of slower global trade. While on an easing path, we are not in the camp expecting an aggressive easing cycle this year.”
Kotak Institutional Equities too flagged a 25 bps of rate cuts each in the April and June policies, accompanied by a stance change to accommodative. “While global risks remain, we see room for an additional 25-50 bps of rate cuts if growth slowdown persists,” it said.