^{Source: The Hindu Business Line}

India’s central bank, the Reserve Bank of India (RBI), has reduced its key policy rate by 25 basis points, bringing it down to 6%—its lowest level since September 2022. The move comes as the world’s fifth-largest economy grapples with decelerating growth, softening inflation, and rising uncertainty from global trade tensions, particularly new U.S. tariffs on Indian goods.

RBI’s Rate Cut: A Measured Response to Economic Pressures

Announced during its latest monetary policy meeting in Mumbai, the RBI’s rate cut was widely anticipated by economists and aligns with consensus forecasts from analysts surveyed by Reuters. This marks the first rate reduction in over a year, reflecting the central bank’s shifting focus from controlling inflation to stimulating economic activity.

In its statement, the RBI cited a “decisive improvement” in the inflation outlook, indicating increased confidence that inflation will remain around its 4% target over the next 12 months. February 2025’s inflation rate came in at 3.61%—the lowest since July 2024—thanks to cooling vegetable prices and favorable base effects.

Growth Slowing: A Turning Point for India’s Economic Momentum

India's economy has shown signs of fatigue in recent quarters. GDP growth slowed to 6.2% in the fourth quarter of 2024, missing expectations. For the full fiscal year ending March 2025, GDP is forecasted to expand by 6.5%, a notable drop from the robust 9.2% seen in the previous year.

The RBI acknowledged this deceleration, stating:

“Growth is still on a recovery path after an underwhelming performance in the first half of 2024-25, impeded by a challenging global environment.”

External Shocks: U.S. Tariffs and Climate Disruptions Add to the Burden

Adding further stress to India’s economy is the recent implementation of U.S. reciprocal tariffs. Starting April 8, 2025, Indian goods face a 26% levy when entering the United States—India’s largest export destination. HSBC economists estimate that these tariffs alone could trim 0.5 percentage points off India’s GDP for the financial year ending March 2026.

Sanjay Mathur, chief economist for Southeast Asia and India at ANZ, cautioned in a CNBC interview:

“A GDP growth rate below 6% is not impossible at this stage, given global shocks and domestic vulnerabilities.”

Compounding concerns is an ongoing heatwave that threatens India’s agricultural output—a sector that contributes roughly 18% to the national GDP. A dip in food production could reverse the recent decline in inflation and further drag rural consumption.

Inflation Outlook: Favorable for Now

Despite external uncertainties, inflation has been trending lower. HSBC projects an average inflation rate of around 3.5% over the next six months, supported by:

• Lower food prices
• Rupee appreciation
• Softer oil prices
• Disinflationary trends from China
• Weak domestic demand

Core inflation, which excludes volatile food and energy components, is also expected to remain subdued. These dynamics have provided the RBI with the space needed to shift toward growth support.

What This Means for Borrowers and Markets

The 25 bps cut in the repo rate is likely to ease borrowing costs for businesses and consumers. Banks are expected to adjust lending rates accordingly, which could boost credit demand in sectors like housing, automobiles, and small businesses. However, with global trade dynamics in flux and domestic growth uneven, the road to recovery remains complex.

Looking Ahead: Will More Cuts Follow?

Economists are divided on whether this rate cut signals the start of an easing cycle or a one-off move. Much depends on the inflation trajectory, the full impact of U.S. tariffs, and how the monsoon season affects agriculture.

The RBI is expected to stay data-dependent but maintain a pro-growth stance unless inflation re-emerges as a threat.

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