RBI delivers second straight rate cut as U.S. tariffs kick in

India’s central bank cut its policy rate by 25 basis points to 6%, marking its lowest level since September 2022 as growth concerns mount in the world’s fifth largest economy.

The rate cut was in line with expectations from analysts polled by Reuters, and comes as the U.S.’ reciprocal tariffs kicked in at midnight stateside (9.31 a.m. India time) with a 26% levy slapped on goods coming in from India.

In its monetary policy statement, the Reserve Bank of India noted that tariffs have increased uncertainties clouding the economic outlook across regions, posing new headwinds for global growth and inflation.

RBI Governor Sanjay Malhotra said in a statement that the central bank will shift its stance from neutral to accommodative, aiming to stimulate the economy through softer interest rates.

“Obviously, the trend is going to be downward,” Malhotra said at a press conference after the decision.

When asked about the impact of U.S. tariffs, Malhotra said he was “more concerned on growth.” He noted that India is better placed than other countries to tackle the tariff-led hikes due to its narrower trade surplus with the U.S. and the lower “reciprocal” tariff rate it received from Washington, compared with other nations.

“My understanding is that the impact of these tariffs on India vis-à-vis some of the other countries [such as] China and some of the other countries, [is] much less,” Malhotra said.

The move from the Reserve Bank of India comes amid softening inflation, but also a slowing economy.

The RBI explained the rate cut was because of a “decisive improvement” in the inflation outlook, adding that there is greater confidence that inflation will align with its 4% target over the next 12 months.

“On the other hand, impeded by a challenging global environment, growth is still on a recovery path after an underwhelming performance in the first half of 2024-25,” the statement said. The bank’s fiscal first half runs from April to September 2024.

More recently, India’s GDP expanded by a weaker-than-expected 6.2% in the fourth quarter of 2024, and the country’s economy is estimated to grow 6.5% in the financial year to March 2025 — a sharp slowdown from 9.2% the year before.

A note from HSBC on April 7 predicted that the announced tariffs will directly shave off 0.5 percentage points from India’s full-year growth for the financial year ending March 2026, adding that there could be indirect and second-order impacts from factors including slower export volumes and weaker foreign direct investment flows.

Sanjay Mathur, chief economist for Southeast Asia and India at ANZ, told on April 3 that there are “definitely” downside risks to India’s GDP growth, saying that a GDP growth figure “below 6% is not impossible at this stage, given the shocks to the global system.”

Mathur also noted that there is also a heat wave in India, which would disturb the country’s agricultural output. Agriculture is a key part of the country’s GDP, making up 18% of its economy.

Headline inflation most recently came in at a lower-than-expected 3.61% in February as vegetable prices cooled, and was at its lowest level since July 2024.

The RBI had estimated a full-year inflation figure of 4% for its coming financial year ending March 2026.

Separately, HSBC estimated that inflation will average approximately 3.5% over the next six months, led by lower food prices.

“Core inflation, too, will likely remain soft, led by the recent appreciation of the rupee, imported disinflation from China, softer oil prices, and weaker domestic growth,” HSBC added.