Is India's Economy Crumbling Under Tariffs? Central Bank Takes Action!

India’s central bank has recently made a significant move by cutting interest rates by 0.25%, a decision influenced by Donald Trump’s tariff announcements which have led to concerning growth projections. The Reserve Bank of India (RBI) has reduced the repo rate from 6.25% to 6%, marking its second cut since February of this year. This rate reflects the interest rate at which the RBI lends to commercial banks, thereby affecting borrowing costs across the economy.

In light of these developments, the RBI has scaled down its growth forecasts for the current year from 6.7% to 6.5% and predicts that the Gross Domestic Product (GDP) will maintain this growth rate next year as well. Notably, the RBI has shifted its monetary policy stance to “accommodative” from “neutral,” indicating a willingness to implement further rate cuts if necessary to stimulate the slowing economy. RBI Governor Sanjay Malhotra pointed out that the trade frictions sparked by tariffs are indeed creating turmoil within the global economic environment.

The initial expectation was for only one more rate cut this year, but economists are now predicting more reductions as the impact of Trump’s tariff war threatens growth in one of the fastest-growing economies worldwide. According to ICICI Bank, the magnitude of rate cuts could reach as high as 100 basis points (1%). With moderating inflation, the RBI has more leeway to reduce borrowing costs, especially as growth momentum weakens due to the ongoing trade disputes.

HSBC reports that India’s GDP could suffer a direct hit of up to 0.5% this financial year as a result of decreased export volumes and diminished foreign fund inflows. Furthermore, the government’s ability to implement measures to offset the impact of these tariffs has been hampered due to declining spending and tax revenues in recent months.

Starting Wednesday, Indian goods exported to the US will face tariffs up to 27%. When compared to the tariffs on China (over 104%) and other countries like Vietnam and Cambodia, India’s situation appears somewhat less dire, but still poses significant challenges. As nations around the globe engage in retaliation—China has imposed 34% tariffs on US imports—India is cautiously pursuing a trade deal with the US, emphasizing the importance of the Bilateral Trade Agreement.

Despite these measures, India’s economy is unlikely to remain unaffected by a potential slowdown internationally, especially if demand for its exports declines amid weakened global growth. Wall Street’s JP Morgan has estimated a 60% chance of global recession, with Moody’s increasing the likelihood from 15% to 35% due to ongoing tariff disputes. Currently, India maintains a 6.5% growth rate, making it the world’s fastest growing major economy, albeit a steep decline from the 9.2% peak recorded in the past financial year.