India Cuts Interest Rates Again Amid Rising US Tariffs and Slowing Economic Growth

The Reserve Bank of India has once again decreased interest rates, marking the second reduction this year in an effort to address the slumping economy affected by new tariffs from the United States. The bank has reduced the repo rate from 6.25 percent to 6 percent to encourage lending and investment, especially amidst escalating global trade tensions.

In conjunction with the rate cut, the Reserve Bank has adjusted its growth forecast downward, now anticipating a GDP increase of 6.5 percent for the year, a decrease from the previously expected 6.7 percent. Inflation forecasts were adjusted as well, with an expectation of a decrease to 4 percent, down from 4.2 percent, which has allowed the bank greater latitude to implement further rate cuts to bolster economic activity.

Sanjay Malhotra, the central bank governor, acknowledged the impact of a 26 percent tariff imposed by US President Donald Trump on Indian imports, noting that while growth is beginning to recover after a sluggish first half of the financial year, it remains below desired levels. The monetary policy committee moved to an “accommodative” stance, indicating that it is open to making further cuts as long as there are no significant economic disruptions.

As the third-largest economy in Asia, India joins other nations in reducing interest rates amid the challenges posed by international tariff wars. The Reserve Bank of New Zealand has also cut rates, highlighting a trend among global policymakers striving to mitigate the negative effects of widespread tariffs on their economies.

Trump's tariff policies have raised concerns about a potential recession in the US and a broader global economic slowdown, forcing emerging markets to contemplate a balance between cutting rates to foster growth and protecting their currencies. Despite the steep tariffs on Indian goods, Trump's levies are notably less severe compared to those on other countries like China, which has retaliated with its own tariffs.

While China has adopted a more aggressive stance in this trade conflict, India has chosen a more measured approach, indicating its intention to conclude a Bilateral Trade Agreement with the US. Economists predict that the impact of increased tariffs could result in a reduction of 20 to 40 basis points in India’s economic growth for the fiscal year, influenced by both direct and indirect factors. One principal economist anticipates that growth will likely fall below the RBI's forecasts, estimating a rate of 6.3 percent for fiscal year 2026.