India File: RBI's moment to fly with the doves

Reuters

08-04-2025

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U.S. President Donald Trump's tariff announcement last week has cast a shadow over central bank policy decisions, including the Reserve Bank of India which will announce its latest decision on Wednesday. Should the Indian central bank turn dovish to counter global headwinds, or hold off given the threat of inflation? That's the focus of our analysis this week.
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THIS WEEK IN ASIA
** China censures Trump tariff 'blackmail' as market turmoil eases
** China state firms vow to boost share purchases to calm markets
** South Korea to hold snap presidential election on June 3
** Trump orders fresh review of Nippon Steel's bid for US Steel
AN EARLY TEST OF TRADE WAR RESPONSES
With less than a week past since markets globally fell into a tariff-driven tailspin, the Reserve Bank of India finds itself among the first high-profile central banks, along with New Zealand, to issue a formal policy response, due on Wednesday.
While Fed Chair Jerome Powell has demurred on whether to respond quickly with rate cuts to bolster growth, wary that a trade war could also trigger inflation, analysts say this is the RBI's moment to step up as a first-mover among the doves.
India's long-running worries about inflation and currency weakness have eased in recent months, while flagging GDP growth has made the central bank more amenable to policy easing that could shore up the world's fifth-largest economy.
Read here to catch up on expectations for the RBI's policy decision.
Weakness in the dollar - and potentially in China's yuan - as well as lower global crude oil prices, which have fallen 13% since last week's tariff announcements, can further help to keep inflation reined in. The RBI has forecast a comfortable inflation rate of 4.2% for 2025/26 - close to its 4% target.
Things are different on the growth front.
At first blush, India appears to have been spared the worst of the new U.S. tariffs, with a "reciprocal" rate of 26% compared with 34% for China and 46% for Vietnam, two of Asia's most heavily export-dependent economies. You can see a graphic on the global spread of tariffs here.
The tariffs' hit to Indian GDP growth is estimated by economists at a modest 20-50 basis points for this financial year, while the government believes its projected 6.3-6.8% growth rate will hold.
But India's policy makers are nervous all the same.
The RBI has forecast GDP growth this year at 6.7%, a slight improvement from a four-year low of 6.5% expected for the financial year just ended in March but still well short of what had become the norm for the world's fastest growing major economy in the post-pandemic years.
The tariffs could also deliver a heavy blow to consumer demand in sectors such as gems and jewellery, although others like textiles may have an opportunity to benefit from higher U.S. tariffs on competing nations.
PRIORITY ON GROWTH AND LIQUIDITY
What's more, the indirect impact of the U.S. tariffs, through global and local financial market turbulence and delayed investment decisions by both domestic and foreign firms, could amplify the hit to growth, warns Citigroup's India economist Samiran Chakraborty.
Vivek Kumar, economist at QuantEco Research, said that reviving domestic consumption and demand should be a priority for the RBI at this stage.
The central bank had already begun to prioritise supporting growth when it cut interest rates in February for the first time in five years.
Since December, it has also infused more than 6 trillion rupees of liquidity into the banking sector, pushing the financial system into a cash surplus. Bankers are now seeking an assurance of adequate and predictable liquidity, which the central bank may consider at this policy review.
"That significant easing of monetary conditions will be immensely supportive of ease of financing by domestic industries amid the turbulent operating conditions," rating agency India Ratings and Research said in a note over the weekend.
In the slightly longer term, Indian policymakers will closely watch whether the trend of a falling dollar and lower oil prices persists.
The recently weaker dollar and strength in the rupee - up 2.3% from February's record low - give the central bank particular comfort, both by keeping a lid on imported inflation and easing concerns that rate cuts would weigh on the currency.
That said, if the global market turmoil persists and reverses a nascent recovery in India's equity markets, the negative wealth effect could be severe, especially for young investors.
How badly will the Indian economy be hit by the global trade war? Write to me at [e-mail], opens new tab
QUOTE OF THE WEEK
"The legislation will improve lessors' confidence in the Indian market and may also make it easier for upcoming airlines to lease aircraft."
Lovejeet Singh, a partner at law firm Chandhiok & Mahajan who specialises in aviation law, said the Indian parliament's passage of the "Protection of Interests in Aircraft Objects" bill will fully implement the Cape Town Convention and Protocol, an international agreement on asset-based financing.
This would help make it easier for global aircraft leasing companies to repossess jets and engines when a carrier defaults on its payments, Singh said.
MARKET MATTERS
Crude oil prices have fallen sharply in the wake of last week's U.S. tariff announcement, a modest rebound on Tuesday notwithstanding, as worries mount over a potentially severe slowdown in the global economy.
Goldman Sachs has raised the odds of a U.S. recession to 45%, a second revision to its forecast in a week. The slowdown could add to already weak demand in Asia.
India, meanwhile, raised some tax levies on petrol and diesel, taking advantage of the lower prices to boost its tax revenues while preventing oil companies from reaping a windfall on the market's moves.