DBS Bank's Radhika Rao believes downside risks for India's FY26 growth may rise if tariffs remain high

Dislocations in the asset markets, particularly bonds, likely persuaded the US administration to impose a 90-day pause on its high reciprocal tariffs for all countries except China. Whether Trump will relinquish sweeping reciprocal tariffs is difficult to say, but a 90-day pause does provide a runway for negotiations to occur and should arrest a further deterioration in market sentiment. Meanwhile, other product-specific tariffs, including those on autos, steel, and aluminium, are maintained.

Considering the change in policy outlook to a more dovish stance, do you foresee an additional 50–100bps cut in the repo rate in FY26?

The Monetary Policy Committee (MPC) voted unanimously in favour of a second successive 25bp rate cut, bringing the repo rate to 6%. In line with our expectations, the policy stance was revised to ‘accommodative’ from ‘neutral’, signalling a bias for rates to either remain on hold or be eased further. Governor Malhotra emphasised that the accommodative stance on policy does not reflect the central bank’s liquidity views, which we interpret to mean that call rates are likely to remain close to the repo rate rather than deviate into the SDF–repo corridor.

Wednesday’s cut comes amid ongoing global uncertainties, including trade tensions and volatile financial markets. Reflecting these external developments and the momentum in domestic indicators, the GDP growth projection was adjusted downward by 20bp to 6.5% for FY26 (DBS-forecast 6.5%), alongside a 20bp reduction in inflation to 4% (DBS-forecast 4.2%). We are mindful of the impact of weather-related factors (e.g. heatwave) that could influence food inflation in Q2-CY25.

The central bank maintained a measured view on tariff developments, highlighting potential implications for the investment climate and net exports. Economic assumptions in the Monetary Policy Report for April 2025 point to softer oil prices, a weak rupee, and headwinds to global growth. Growth and inflation projections for FY27 stand at 6.3% and 4.3% respectively, implying a softer GDP impulse while inflation ticks up marginally.

Do you anticipate a major impact on growth numbers due to tariff-related uncertainty? Is a 6.5% growth target for FY26 achievable?

Authorities are watchful of possible spillover risks from tariff-related developments and the second-derivative impact from a potential slowdown in global growth. Given the relatively smaller exposure of India’s exports to the US (~2.2% of GDP), the effect is expected to be limited, with an asymmetrical influence on the sectors. With domestic drivers contributing to the bulk of growth, the official forecast looks reasonable at this juncture. However, if tariffs are maintained at high levels for a prolonged period, downside risks are likely to rise.

What is your view on liquidity conditions following the RBI's policy decision?

There has been a strong emphasis on boosting liquidity in the past four months. While there were no explicit liquidity announcements on Wednesday, recent measures have underscored the preference to keep the balance in surplus, thereby keeping the banking system well-oiled and easing policy transmission.

In the week ending April 4, Call rates eased significantly, as the weekly banking system balance stayed in surplus consistently for the first time in the past four months. The April–June quarter is also expected to benefit from a significant RBI dividend payout, estimated to be north of Rs 2 lakh crore. Open market operations were already at a four-year high in FY25.

Do you agree with the inflation forecast announced by the central bank?

Domestic data has aligned to make way for the Monetary Policy Committee (MPC) to lower rates further, characterised by easing inflation and growth, whilst depreciation pressure on the rupee has eased significantly. January–February inflation, combined with our early estimate for March, points to a 40–50bp undershoot in the actual versus RBI’s quarterly forecast. Our trimmed inflation measures stayed flat, reflecting benign conditions.

Encouragingly, more than 67% of the inflation basket rose by less than 4% year-on-year at the start of 2025, with only a small pocket above the mid-point of the target range. While the easing trend in vegetable prices may face seasonal pressures during CY-2Q25—particularly due to high temperature forecasts from the national meteorological agency—we anticipate inflation readings to remain close to the 4% target, with no significant deviation expected.

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