RBI may cut FY26 growth forecast as tariff impact deepens, say economists

Reserve Bank of India

The Reserve Bank of India (RBI) is likely to revise its projections on GDP growth for financial year 2025-26 in the upcoming monetary policy as the full implications of the recently imposed 50 percent tariffs on Indian exports come into effect.  Economists anticipate a cut of 25-40 basis points (bps) from the current 6.5 percent forecast.

“It was largely clear from the RBI’s commentary at its last MPC meeting that the FY26 growth projection of 6.5 percent did not fully account for the impact of US tariffs. The MPC acknowledged external uncertainties but stopped short of incorporating the scale of the shock,” said Yuvika Singhal, Economist at QuantEco Research. Additionally, with the 50 percent tariff scenario firming up as the base case, a downward revision appears inevitable.

QuantEco expects a 0.3 percent to 0.4 percent downside to the RBI’s FY26 estimate.

The brunt of the impact is expected to fall on labour-intensive sectors such as textiles, jewellery, and auto components, segments with high exposure to the US market. At the same time, domestic measures like GST rate reductions may provide some cushion to revive the consumption pattern, but economists caution the offset will depend on the extent of pass-through to end consumers.

Madhavankutty G, Group Chief Economist at Canara Bank, said, “If we take the consumption impact of GST tweaks into account, the effect of a full pass-through works out to around 45 to 50 bps. That mitigates the tariff impact. But if only 50 percent is passed on, the GDP boost shrinks to 25 bps.”

He added that the RBI may lower its growth forecast by 25 bps in the upcoming policy meet if GST relief fails to deliver the expected demand push.

On the trade front, Madhavankutty estimates that exports could decline by $30 billion -35 billion over the year due to the tariff shock. Even after factoring in cheaper Russian oil, the net export loss would be $25 billion-30 billion, translating to a GDP drag of 60-80 bps annually, or about 35-45 bps for the remainder of FY26, starting September. These estimates assume no new tariffs are imposed on key sectors like semiconductors, pharmaceuticals, or IT services.

Radhika Rao, Executive Director and Senior Economist at DBS Bank, believes the duration of the tariffs will be the key determinant of how much growth is shaved off. “If the punitive 50 percent tariff remains in place only until end-2025 and returns to a more competitive 15–20 percent thereafter, the impact will be limited,” she said. However, if it extends through FY27, the growth impact could widen to 50-60 bps, spread between the second half of FY26 and into FY27.

In the most pessimistic scenario, where tariffs squeeze out half of India’s export basket to the US, growth could take a 1.0-1.2 percentage point hit. But Rao considers this outcome less probable given ongoing bilateral and multilateral trade negotiations.

DBS expects the repo rate to remain at 5.5 percent for the rest of FY26, but Rao noted that “signs of caution in the RBI’s commentary ahead of the October and December reviews could open the door for up to 50 bps of rate cuts, especially if growth shows further signs of deterioration.”

She also pointed out that while recent relief measures, such as income tax tweaks and GST rationalisation, provide some policy support, their effects are likely to be short-term and not structurally demand-boosting beyond FY26.

With external headwinds intensifying and domestic offsets proving uneven, the consensus is building that the RBI will be guided more by growth than inflation over the coming quarters. A downward revision to the FY26 growth forecast now appears increasingly likely, and the tone of the upcoming MPC meeting will offer key signals on whether the central bank is preparing to pivot its stance.

As global protectionism resurfaces and exports weaken, all eyes will be on the RBI's October policy review, not just for changes in forecasts, but for the first signs of a potential shift in India’s monetary policy direction on the rate and stance front.