India Holds Rates at 5.5% as Trump Tariff Threats Fuel Economic Uncertainty

India central bank has paused further rate cuts, citing easing inflation and geopolitical volatility. Trump looming tariffs add pressure to the already fragile macroeconomic outlook.

The Reserve Bank of India (RBI) has decided to keep its key policy repo rate unchanged at 5.5%, following three consecutive cuts totaling 100 basis points since February. This move, announced on Wednesday, reflects the growing global uncertainty driven by U.S. tariff threats and moderating domestic inflation. The central bank’s decision aligned with forecasts from economists surveyed by Reuters.

Governor Sanjay Malhotra stated that while inflation has dropped to a six-year low of 2.1% in June, there is limited capacity for further monetary support in the short term. “The current macroeconomic conditions, outlook, and uncertainties call for continuation of the policy repo rate of 5.5% and wait for further transmission of the front-loaded rate cut,” Malhotra said.

India’s Monetary Policy Committee shifted from a neutral to accommodative stance unanimously, noting that food price volatility and crude oil spikes—especially a potential 10% rise in oil—could push inflation higher by 20 basis points. However, the RBI still expects average inflation to remain significantly below its 4% target in 2025.

In terms of GDP, the central bank has maintained its growth forecast at 6.5% for the financial year ending March 2026. India posted a strong 7.4% GDP growth in the March quarter, outperforming expectations of 6.7%. The full fiscal year 2024–25 recorded 6.5% growth, consistent with government estimates.

Global pressures are also shaping the RBI’s cautious approach. President Trump recently threatened to impose 25% tariffs and additional sanctions on India beginning August 7. The former president criticized India’s energy dealings with Russia, accusing the country of profiting from discounted Russian oil while indirectly funding the war in Ukraine.

India’s Ministry of External Affairs pushed back, calling out the U.S. and EU for their own ongoing trade ties with Moscow. Tensions continue to escalate as India’s Foreign Minister prepares to visit Russia, and National Security Adviser Ajit Doval landed in Moscow just yesterday. President Putin is also expected to visit India later this year—his first time since the 2022 Ukraine invasion.

Michael Kugelman of the Wilson Center noted that Trump’s aggressive stance may be an attempt to pressure India away from its non-alignment policy by targeting its strategic autonomy. Meanwhile, economists from Bank of America predict another rate cut may still come in Q4 2025 if macroeconomic clarity improves.

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