RBI policy pause probably as trade, tariff uncertainties cloud growth prospects

Copyright © HT Digital Streams Limit all rights reserved. Rajani Sinha 4 min Read 28 Sept 2025, 04:26 PM is apart from the further infusion of the liquidity in the system through the CRR cut, the RBI may continue to intervene as needed to maintain sufficient liquidity in the system and to ensure the speed cuts so far. (Reuters) Summary with GDP growth estimated at about 6.5% for FY26, the central bank may not need further rate cuts. However, if America’s sharp 50% tariff lasts for a long time, and the growth prospects worsen, the central bank may consider a rate cut later during the year. Worldwide uncertainties have escalated, which complicates the Reserve Bank of India’s (RBI) monetary policy decision. Even with inflation dampened, there is no rest for the central bank, as the growth of growth has been subdued by US rates. What further complicates the matter is the uncertainty surrounding the US trade policy and the likelihood of a trade agreement. India’s domestic demand indicators have improved, and policy support in the form of GST rate cut will further increase domestic demand. In these uncertain times, the central bank must accept a guardian and guard policy to gain further clarity on the growth of growth. With a 50% duty imposed by the US, India became one of the highest rates nations. Exports to the US form only about 2% of India’s GDP. Nevertheless, with this high tariff, the export of India will feel a big blow. The annual impact of the 50% tariff could be as high as 0.8-1% of GDP. While the export of goods has already taken place under tariff pressure, the recent announcement by us from higher H-1B visa fees and the proposed rental relocation of employment), which also wants to combat the outsourcing of US enterprises, also shadow a shadow on the export of services. India is in the midst of negotiating a trade agreement with the US, and this could cause rates to lower. However, there has been no further clarity on this so far and uncertainty remains. Even with the performance of the pinch, we estimate the Indian current account deficit to the GDP to stay comfortable at about 0.9% (base scenario) and even with a higher risk, it can only worsen about 1.3% in FY26. India’s current account deficit is supported by the execution of healthy services, overpayments and benign global crude oil prices. Capital flow was adversely affected by persistent FII outflow of the stock market and poor net FDI flow. Capital flow is likely to remain volatile in the midst of global uncertainties. However, India’s high forex reserves of about $ 700 billion are a ease. With the exacerbation of external prospects, the government is trying to increase domestic demand. The recent GST rationalization is a step in the right direction, and it should help to strengthen domestic consumption and reduce inflation. The government may also consider targeted support for some of the export sectors involved, such as textiles, ready -made garments, jewelery and jewelry and seafood. In general, we expect India’s GDP growth in FY26 to be approximately 6.5%, based on the assumption that the additional penalty tariff of 25% will be removed soon. However, GDP growth can drop closer to 6% if the 50% tariff stays longer. CPI (inflation on consumer price index) is under control, with average inflation for the past three months at 1.9%. The sharp decline in inflation in the last few months is due to moderation in food prices, and the statistical impact of the high base of last year. CPI inflation is likely to have a benign 2.7% in FY26 on average, after the GST rate reduction impact has been included. However, next year we will see again that inflation is rising again as the base effect reverses. The inflationary prospects will also depend on the monsoon situation next year. We expect CPI inflation to violate 4% level in the Q4 FY26 and average about 4.5% in FY27, assuming a normal monsoon. The system liquidity has been abundant in the last few months of temporary density. We saw the call rate hanging below the policyage rate. Apart from the further infusion of the liquidity in the system by the CRR (cash reserve ratio), the RBI may continue to intervene as needed to maintain sufficient liquidity in the system and ensure the shipping of the rate cuts so far. As the policy rate has already been reduced by 100 BPS and the CRR by a large 1% in the current year, the central bank may decide to wait and get further clarity on the US trade policy and the impact on the Indian economy. With GDP growth estimated at about 6.5% for FY26, the central bank may not need further rate cuts. With the repo rate at 5.5% and inflation estimated at 4.5% next year, the real interest rate will be about 1%, which is why a further stimulus may not be needed. However, if the high tariff scenario continues and the growth of growth worsens, the central bank may consider a rate reduction later during the year. The author is chief economist at CareEDE Ratings. Catch all the business news, market news, news reports and latest news updates on Live Mint. Download the Mint News app to get daily market updates. More Topics #rbi #rbi mpc #repo -Rate #trade #india #tariff hike #economy Read next story