India’s central bank has cut interest rates by 0.25% in response to a slew of economic downgrades after Donald Trump’s tariff announcements.
The Reserve Bank of India (RBI) slashed repo rates from 6.25% to 6%, the second cut since February, when rates were lowered after nearly five years.
The repo rate is the rate at which the central bank loans to commercial banks, hence impacting borrowing costs.
The RBI also reduced its growth expectations for this year from 6.7% to 6.5 percent. It predicted that India’s GDP would increase at 6.5% next year as well.
Crucially, the RBI shifted its monetary policy stance to “accommodative” from “neutral”, which means that the central bank would be more open to cutting rates in the future to stimulate a slowing economy.
“Concerns on trade frictions are coming true” and unsettling the global community, RBI governor Sanjay Malhotra said in his speech, adding that headwinds from disruptions to trade would continue to pose challenges for the economy.
Most economists who had previously expected only one more rate cut this year are now predicting more softening as Trump’s tariff war puts growth in the world’s fastest growing major economy at risk.
Moderating inflation will give the RBI further elbow room to slash borrowing costs, according to several brokerages, as growth momentum further loses steam due to Trump’s global trade war.
HSBC calculates GDP could take a direct hit of as much as half a percent this financial year due to slower export volumes around the world and weaker inflows of foreign funds.
The government’s capacity to stimulate the economy to counter the impact of Trump’s tariffs is also limited because “spending and tax revenues have lost steam in recent months”, according to HSBC.
Starting Wednesday, Indian goods being exported to the US will face additional tariffs of up to 27%.
