RBI keeps repo rate unchanged with an eye on Trump's tariff threats

The governor added that over the medium term, Indian economy holds "bright prospects" amid a changing world order drawing on its inherit strength, robust fundamentals and comfortable buffers. "The coordinated use available with us helps accelerate monetary policy transmission in current easing cycle," he said.

On Trump's tariff threats, the governor signalled that the central bank is keeping an eye on the situation as the "uncertainty over tariffs are still evolving".

The central bank maintained its GDP growth projection at 6.5 percent for FY26. The CPI inflation was revised downwards to 3.1 percent for the fiscal from the earlier projected 3.7 percent.

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Following the announcement, bond yields surged as traders were divided on the direction of the interest rates, saying Malhotra's policy statement had no obvious dovishness.

The benchmark 10-year bond yield increased 4 bps to 6.3701 percent, while the rupee was little changed at 87.7350. The benchmark equity indexes BSE Sensex and Nifty50 were down around 0.2 percent each.

Malhotra said the rate-setting panel has noted that the inflation outlook in the near term has become more "benign" than expected and the average CPI inflation this year is expected to remain significantly below the target on lower food inflation.

"However, CPI inflation is likely to edge up above the 4 percent target from Q4 onwards," he said.

On economy, the governor said domestic growth is "holding up" and evolving along the lines of RBI's assessment, "though some high frequency indicators showed mixed signals in May and June".

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Malhotra said the reduction in the cash reserve ratio announced in the June policy meeting will further support liquidity conditions and the central bank will continue to be "flexible" in its liquidity management. "We will endeavour to maintain a sufficient liquidity in the banking system so that the productive requirements of the economy are met and transmission to money markets and the credit markets remains smooth," the governor said.

The governor also said an internal working group has been set up to review our liquidity management framework and its report will soon be published for public consultation.

The decision comes at a time when Trump has announced a 25 percent tariff plus penalty on Indian exports with a likelihood of “substantial increase” in duties.

The central bank’s rate-setting panel decided to keep the powder dry for now as it continues to assess the developing situation with government officials still actively engaged in negotiations with the US officials for a trade deal.

A few experts in the poll believed the MPC should opt for a cut now as inflation was well-under control and easing would boost festive spending and credit growth.

In the previous bi-monthly meeting in June, Malhotra and his team announced a surprise 50 bps cut, easing the rate by 100 bps since February. In June, the country’s inflation dropped to 2.1 percent, which was below the central bank’s target for five straight months.

However, Trump’s latest tariff threat, where he warned that US could impose higher duties on Indian goods for “funding” Russia’s war machine in Ukraine with the purchase of oil and other military equipment, could derail New Delhi growth projections. Experts believe a 25 percent tariff rate on India, which is higher than many of its Asian rivals, could impact the growth by as much as 30 bps.

With Reuters inputs