India's RBI to hold interest rates as U.S. tariff tensions mount

On Wednesday, the Reserve Bank of India agreed to maintain repo rates at 5.5% amid rising global tensions caused by Trump’s tariffs. The central bank’s policy rate decision also aligned with expectations from economists polled by Reuters. 

India’s Reserve Bank cut interest rates by 50 basis points during its previous meeting in June. The Bank’s Governor, Sanjay Malhotra, argued that there was limited room for monetary policy to support growth due to the previous 50-basis-point cut.

India expects inflation to remain below 4%

https://t.co/adYFVZbNQw

— ReserveBankOfIndia (@RBI) August 6, 2025

India’s RBI has issued three consecutive rate cuts totaling 100 basis points since February, adding that its latest decision to switch from neutral to accommodative was unanimous. It also mentioned that its stance on monetary policy came due to easing inflation and rising global uncertainties.

Analysts at Bank of America argued that New Delhi’s previous rate cuts saved the country’s markets. They believe that the RBI will only pause rates for now, but that could change if there’s a major shift in the macroeconomic outlook. The analysts also expect another rate cut this year – likely in the fourth quarter of 2025 – once the GDP growth outlook becomes clearer.

Malhotra argued that volatile food prices have kept headline inflation much lower than projected earlier. RBI also warned that a 10% surge in crude prices could increase inflation by 20 basis points.

India’s inflation reading in June hit a fresh six-year low of 2.1%, suggesting a possible rate cut. The Monetary Policy Committee expects India’s inflation for 2025 to remain significantly below the RBI’s target of 4%. 

The committee also estimates that food price volatility will cause a rise in inflation in Q4 of 2025. Malhotra said the MPC will determine the future trajectory of monetary policy by assessing the incoming data and economic projections.

“On balance, the current macroeconomic conditions, outlook, and uncertainties call for continuation of the policy repo rate of 5.5% and wait for further transmission of the front-loaded rate cut to the credit markets and the broader economy.”

–Sanjay Malhotra, Governor of the Reserve Bank of India.

The RBI also kept its GDP growth forecast neutral, at 6.5% for the financial year ending March 2026. It also cut its inflation forecast to 3.1%, down from its previous estimates of 3.7%. 

India saw a surge in its GDP in the quarter ended March at 7.4%, which was higher than the Reuters poll estimates of 6.7%. India’s FY24/25 also registered an overall economic growth of 6.5% in line with the government’s estimate.

India faces trade challenges and geopolitical uncertainties

Malhotra argued that the central bank’s decision to maintain rate cuts came as New Delhi faces global trade challenges with the U.S. Earlier last week, Trump threatened to impose 25% tariffs and additional unspecified penalties on the country starting August 7.

Trump condemned India for having energy deals with Russia in the wake of the war in Ukraine. The President argued that the purchase of Russian oil helps finance Moscow’s war on Ukraine and that India didn’t care how many lives were lost in the war. He also believed that New Delhi was purchasing Russian oil and selling it on the open market for big profits.

Director of the South Asia Institute at the Wilson Center in Washington, Michael Kugelman, believes that Trump is trying to wean India off its autonomy policy by going after its ties with Russia. On Monday, India’s Ministry of External Affairs accused the U.S. and EU of double standards for having trade deals with Moscow. 

India revealed that its Minister of External Affairs, S Jaishankar, will visit Russia later this month. The country also disclosed that its National Security Adviser Ajit Doval landed in Moscow yesterday and Putin will also visit India later this year for the first time since the 2022 invasion of Ukraine.

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