US tariffs unlikely to derail RBI rate cuts amid domestic growth slowdown

Reserve Bank of India

The tariff imposition by US President Donald Trump is unlikely to influence the rate action by the Reserve Bank of India (RBI) as a likely slowdown in global and domestic growth, and easing retail inflation, may give more room to the central bank to cut rates, economists said.

“For now, the base case is for two more cuts by RBI (April and June) driven by inflation pressures easing,” said Gaura Sengupta, Economist at IDFC First Bank.

A Moneycontrol poll of 21 economists, treasury heads and fund managers also showed that the RBI’s Monetary Policy Committee (MPC) during its first meeting in the financial year 2025-26, which began today, is expected to cut the repo rate by 25 basis points on April 9.

This is due to the expectation of slower growth driven by global uncertainties and tariff imposition by the US. Also, lower retail inflation gives room to the RBI to cut rates.

Last week, Trump unveiled global reciprocal tariffs under which the US would charge a 34 percent tax on imports from China, a 20 percent tax on imports from the European Union, 25 percent on South Korea, 26 percent on India, 24 percent on Japan and 32 percent on Taiwan.

India has been facing growth challenges – despite a rebound in the third quarter of the financial year 2024-25 – which have now been exacerbated by the latest round of reciprocal tariffs.

The Indian economy recovered in the December quarter to grow at 6.2 percent after sinking to a seven-quarter low of 5.6 percent in the July-September period, according to the data released on February 28.

An SBI Research report dated April 7 stated that India’s exports to the US account for only around 4 percent of GDP, so the direct impact appears limited. However, the collateral impact from the overall global growth slowdown and heightened financial market volatility will take a toll going forward.

Inflation dynamics

Economists are of the view that lower commodity prices will have a positive impact on inflation going forward.

Madhavankutty G, Group Chief Economist at Canara Bank, said that Trump's policies are expected to adversely impact global growth and trade volumes, which will exert a downward bias on Brent prices, and, to that extent, inflation will decline.

The lower inflation allows the RBI to focus more on the growth. This is because inflation is currently trending below the RBI’s medium-term target of 4 percent.

RBI Governor in the February monetary policy has said that these growth-inflation dynamics open up policy space for the MPC to support growth while remaining focused on aligning inflation with the target.

India’s retail inflation eased to a seven-month low of 3.61 percent in February, as food inflation moderated below 4 percent for the first time in nearly two years.