Moneycontrol Pro Panorama| RBI minutes flag rising odds from external uncertainties

A concern for the RBI is that lower inflation has not yet given the confidence that core inflation has been reined in.

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If there’s one message that rings loud and clear from the Reserve Bank of India’s (RBI) August policy meeting minutes, it’s uncertainty -- more pervasive than what was witnessed even during the post-Covid recovery and one that poses risks to the economy from prolonged geopolitical tensions, trade disputes and tariff war risks.

The RBI’s rate-setting committee unanimously chose the “wait-and-watch” approach with a pause on rates in its August meet, citing “continued challenges to the sustainability of economic growth, especially in the manufacturing sector, posed by the trade policy uncertainties and subdued private investment, while inflationary pressures have eased further”.

To be sure, US President Trump’s tariff threats seem to be eclipsing the benefits of RBI’s bold 100 basis points (bps) rate cuts taken in 2025. Even though the additional 25 percent penalty tariff was not levied at the time of the August meet, economists estimated that even a 25 percent tariff could hit India’s GDP growth rate by 0.2-0.3 percentage points. The MPC members too cited concerns on growth, with a ripple-effect on labour-intensive manufacturing sectors and the medium-scale enterprises.

The RBI did acknowledge that the UK-India FTA is a positive development, but did not hesitate to state that the US tariffs on India are causing anxiety about the economic outlook. Besides, the uncertainty on bilateral trade relations with other countries is also clouding the private investment outlook, which was expected to gradually replace the heavy lifting done by government capex in the past few years.

My colleague Aparna Iyer in this article says the minutes reflect concern over the moribund private investment climate, the depressed demand conditions, the weak employment outlook, all of which were heightened because of America’s tariffs.

However, today’s news of HSBC Flash India Composite PMI Output Index in August rising, with both manufacturing and services sectors reporting accelerated growth and high levels of business activity, brings hope of better times.

Another concern for the RBI is that lower inflation has not yet given the confidence that core inflation has been reined in. Furthermore, there are risks of a base effect induced rise in inflation above the RBI’s 4 percent target in the second half of FY2026. In this context, the hope is that the rate-cut transmission and the proposed goods and services tax (GST) reforms should enable lower inflation, while also spurring consumption in the quarters ahead.

That said, the RBI minutes do not indicate whether the MPC is willing to cut rates in the next meeting. However, some economists opine that the neutral stance allows them to be more data-dependent, thereby leaving space for policy easing and rate cuts. The trump card, of course, will be the decision of US tariffs on India.

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