India’s central bank maintained key interest rates on Wednesday, as anticipated, stating that the economy remains stable. However, economists predict that steep U.S. tariffs on Indian exports and subdued inflation could create opportunities for limited further easing.
Starting Friday, India faces the introduction of a 25 percent tariff on shipments to the U.S. President Donald Trump has cautioned of “very substantial” additional levies due to New Delhi’s oil imports from Russia.
Global trade challenges continue to be an issue, yet the outlook for the Indian economy remains “bright,” according to Reserve Bank of India (RBI) Governor Sanjay Malhotra in a statement. The six-member rate-setting panel unanimously voted to keep the key repo rate at 5.50 percent while opting for a “neutral” policy stance.
Market reactions post-announcement
Although headline inflation is significantly lower than anticipated, Malhotra noted that this is primarily due to fluctuating food prices and is expected to rise towards the end of the year. A substantial majority of economists, 44 out of 57 surveyed in a Reuters poll conducted from July 18 to 24, had predicted a pause following a surprising 50 basis point cut in June.
In 2025, the central bank has reduced the policy repo rate by 100 basis points thus far as price pressures have eased. While many economists believe there is room for limited further easing, some suggest that low inflation and trade uncertainties might lead to an additional 50 basis points in rate cuts.
Following the policy announcement, bond yields increased, with traders commenting that the policy statement did not display any clear dovishness, leaving the market divided regarding the future direction of interest rates, according to Reuters. India’s benchmark 10-year bond yield rose by 4 basis points to 6.3701 percent, while the rupee remained relatively stable at 87.7350. The benchmark equity indices fell by approximately 0.2 percent each.
Inflation eased to a six-year low of 2.10 percent in June and is anticipated to decline to record lows when July data is released next week, before rising again later in the year.
GDP growth forecasts
The Reserve Bank of India has maintained its GDP growth forecast for fiscal year 2025/26 at 6.5 percent, with a slight increase projected to 6.6 percent for the fiscal year 2026/27, signaling confidence in sustained economic expansion despite global trade tensions and tariff pressures. Inflation projections have been revised downwards to 3.1 percent from earlier estimates of 3.7 percent, keeping inflation comfortably within the RBI’s target range of 2–6 percent — a factor that supports the neutral monetary policy stance.
The RBI also held the Standing Deposit Facility (SDF) and Marginal Standing Facility (MSF) rates steady at 5.25 percent and 5.75 percent, respectively, ensuring stability in short-term borrowing costs. Significantly, the RBI had earlier cut the Cash Reserve Ratio (CRR) by 100 basis points from 4 percent to 3 percent, phased in across four tranches starting September 2025, to inject liquidity into the banking system and stimulate credit growth. These actions were underpinned by the central bank’s desire to balance growth with price stability amid global uncertainty.
Market analysts, including those from Bank of America, acknowledge that the RBI has “removed the punchbowl from the markets” with its bold rate cuts earlier in the year and foresee a cautious approach to future easing, conditional on data pointing to clearer growth trends. They expect any further rate reduction to likely occur in the fourth quarter of 2025, contingent on macroeconomic developments.
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