RBI's rate cut hopes fade as Trump talks high tariffs
Reserve Bank of India
's monetary policy decision next week even as a final word on the trade deal is awaited.
While most economists were not expecting a back-to-back cut in interest rates after June's unexpectedly large 50-basis-point reduction, Governor Sanjay Malhotra's recent comments had revived hopes of lower rates in the August 6 policy review. More so, as inflation fell to its lowest level in more than six years in June.
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However, a rate cut now would put additional pressure on the rupee, which has already weakened to a five-month low on Thursday following Trump's post on Truth Social. The currency fell as much as 0.4% to 87.7375 per dollar in early Mumbai trading, approaching its all-time low of 87.9563 in February. Equities also declined, with the NSE Nifty 50 Index falling as much as 0.9%.
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With the US Federal Reserve holding interest rates steady — citing signs of a slowing economy — there is little incentive for emerging markets such as India to ease policy further.
Volatility in foreign exchange and interest rates will likely 'feed into RBI's reaction function, partly constraining further near-term easing at a time when inflation dynamics have turned highly favorable,' said Madhavi Arora, economist with
Emkay Global Financial Services Ltd
.
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Economists do not expect the steep US tariffs to significantly hurt the South Asian economy, for now. Last year, nearly a fifth of India's total exports, valued at $81 billion, or 2.1% of the gross domestic product, went to the US.
India's economy is relatively closed and driven by 'domestic demand as the mainstay of growth,' which limits the impact, said Aastha Gudwani, India economist with Barclays. She estimated the 25% tariffs could reduce India's GDP growth by around 30 basis points.
The tariffs may have an indirect impact through the 'uncertainty channel,' weighing on domestic investment, Goldman Sachs Group economists led by Santanu Sengupta wrote in a note.
'Elevated policy uncertainty in the US can cause Indian firms, particularly those exposed to US tariffs, to postpone investment decisions,' the Goldman economists said, warning of potential downside risks to their growth forecasts for India in calendar years 2025 and 2026.
Following Trump's post, India's federal government said it would continue to negotiate for a 'fair, balanced and mutually beneficial,' deal. In remarks to reporters at the White House later on Wednesday, Trump said his team was still in discussions with India.
'Another way to interpret' the latest development is to see it 'as a starting point for renewed negotiation,' wrote Pranjul Bhandari, chief India economist at HSBC Holdings Plc.
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