Opinion What RBI’s decision to not cut rates says about India and Trump tariffs
With growth momentum likely to be maintained at around 6.5 per cent, there is no need for further rate cuts. Only if the growth trajectory gets severely dented by the aggravation of trade risks can we expect a further rate cut by the central bank in this cycle.
RBI Governor Sanjay Malhotra ahead of the monetary policy press conference in Mumbai on Wednesday. (Express Photo: Amit Chakravarty) 
-
Share -
-
-
The RBI’s Monetary Policy Committee (MPC), in line with our expectations, left the policy rate unchanged and maintained the stance at neutral. The central bank highlighted that the sharp decline in inflation is primarily due to volatile food prices, specifically vegetable prices. Moreover, it cautioned that with the low base of this year, CPI inflation is projected to rise above 4 per cent and beyond in 2026, implying that there is limited room for further rate cuts in this cycle. The central bank was broadly optimistic about growth and kept the GDP growth projection unchanged at 6.5 per cent for FY26, while acknowledging the uncertain external demand scenario.
CPI inflation fell sharply to around 2 per cent in June 2025 and is estimated to remain benign at around 2.5 per cent in the next two quarters. With the sharper-than-expected fall in inflation, the RBI has lowered the CPI projection for FY26 to 3.1 per cent. Vegetable inflation that was very high in 2024, averaging 27 per cent, has recorded sharp deflation, averaging -15 per cent in the last three months. The vegetable price sub-index that contributes around 6 per cent to the overall CPI index has been particularly volatile in the past year. If we exclude vegetable prices, CPI inflation was in the range of 3-4 per cent for the entire FY25 and remains in the same range in Q1 FY26.
Apart from vegetables, many other components of the food basket are also seeing low inflation or deflation, supported by a good monsoon and a high base from last year. The point to note is that a large part of the fall in inflation is because of the statistical base effect. However, next year, we will see inflation rising again as the base effect reverses. We expect CPI inflation to breach the 4 per cent level in Q4 FY26 and average more than 4.5 per cent in FY27 — this is broadly in line with the RBI’s projections.
As far as growth is concerned, RBI remains optimistic and has maintained the GDP growth projection for FY26 at 6.5 per cent (broadly in line with our projection of 6.4 per cent). Factors like recent interest rate cuts, strong agricultural activity boosting rural demand, benign inflationary conditions, favourable monsoon and lower income tax burden are supportive of growth this year. While the recently announced higher reciprocal tariff by the US has raised some growth concerns, it should be noted that India is a domestic demand-driven economy, and merchandise exports to the US contribute only around 2 per cent to our GDP. We feel the adverse impact of tariffs through the export channel could be limited. It’s also important to consider that there is still a lack of clarity on US trade policy, and hence it’s difficult to assess the overall impact on GDP growth. It is quite possible that India manages to negotiate a trade deal with the US, leading to lower tariff barriers.
On the domestic front, there are some concerns around consumption and investment recovery not being broad-based. While a healthy monsoon has supported rural demand, subdued income growth in urban areas is concerning. This becomes specifically critical amidst weak hiring in the IT sector. Our study shows that aggregate headcount at the top five domestic IT firms plateaued in FY25 after a 4 per cent contraction in FY24. Growth in employee cost for IT firms in our sample (670 listed non-financial companies) slumped to just 5 per cent in FY25 from an average growth of 14 per cent between FY19 and FY24. We feel that the subdued household income growth is also getting reflected in weaker consumption growth, specifically in urban areas.
On the investment front, the Centre’s push to capex has continued with a growth of 52 per cent recorded in Q1 FY26. However, private players remain cautious in the midst of economic uncertainties. Even in the midst of these headwinds, India is likely to manage a healthy growth in FY26.
most read
India’s external sector will continue to face uncertainties given the risk posed by the US’s reciprocal tariff. The benefit that India had vis-à-vis some of the other Asian peers has been reversed, with India now facing a higher tariff. We expect India’s merchandise exports to contract in FY26. However, services exports will remain healthy, albeit with some moderation in growth. Overall, we expect India’s current account deficit to be manageable at 0.9 per cent of GDP in FY26. However, capital flows could remain volatile in the midst of aggravated global uncertainties. With forex reserves at a comfortable level of $689 billion covering 11 months of merchandise imports, we can say that India’s external sector is broadly insulated, though we need to remain cautious.
What should we expect going forward? RBI had already cut the policy rate by 100 bps since February 2025 and taken measures to ensure ample liquidity in the system to facilitate rate transmission. Hence, the central bank would now like to wait and watch to see the impact of further transmission. Moreover, with average CPI inflation expected to be around 4.5 per cent or even more in 2026, we are already talking about a very low real interest rate of around 1 per cent. With growth momentum likely to be maintained at around 6.5 per cent, there is no need for further rate cuts. Only if the growth trajectory gets severely dented by the aggravation of trade risks can we expect a further rate cut by the central bank in this cycle.
The writer is chief economist, Care Edge Ratings
-
Share
-
-
-
Share
