US PRESIDENT DONALD Trump slapped an additional 25 per cent tariff on India, taking the total to 50 per cent. Earlier, he had warned that if India did not stop oil imports from Russia, it would face special tariffs. India did not budge, and Trump delivered on his threat. The higher tariffs will take effect from August 27. The move has thrown the RBI’s monetary policy statement and its status quo stance out of gear. The repeated assertion “we are in uncertain times and we don’t know” underscores the central bank’s cautious approach. The previous policy had partly factored in tariff-related risks, pegging growth for the year at 6.5 per cent. That target has been retained in the latest policy. During the press conference, a deputy governor noted that the first-order impact of tariffs on growth and inflation is limited.
MONETARY POLICY IN A BIND
The Monetary Policy Committee (MPC) kept the repo rate unchanged at 5.5 per cent, arguing that current macroeconomic conditions call for waiting until the effects of earlier, front-loaded rate cuts are fully transmitted to credit markets and the broader economy. The MPC flagged risks to growth from prolonged geopolitical tensions, global uncertainties, and volatility in financial markets. Inflation, meanwhile, could inch above 4 per cent by Q4 2025–26, driven by base effects and demand-side pressures from policy actions. Core inflation is expected to hover moderately above 4 per cent, while weather-related shocks could add further upside risks.
CALLS FOR BOLD REFORMS
While outlooks for growth and inflation remain unchanged, the MPC has pushed policy shifts to the next meeting. Much will depend on how the Modi government responds to Trump’s pressure tactics. If India holds its ground, the coming months will likely bring countermeasures to cushion exports, the currency and the broader economy. But there is also an opportunity as industrialist Anand Mahindra tweeted, to rise to the occasion and implement big, transformative reforms. “We cannot fault others for putting their nations first. But we should be moved to make our own nation greater than ever,” he said.
TRANSMISSION AND THE LAG EFFECT
From a monetary policy perspective, the RBI notes that of the 100 basis points in rate cuts delivered so far, about 77 basis points have been transmitted. The full impact on growth will take time and with these tariff measures, the recovery could face further delays. In fact, fears of a slowdown could resurface, undermining business confidence. Rhetoric notwithstanding!
The steep tariffs could offset much of the growth boost expected from earlier rate cuts, through both direct hits to exports and indirect pressures on the wider economy. In such a scenario, rural demand could become a key driver, but its strength may be short-lived. Demand-led growth indicators such as housing, auto sales and consumer durables show no outright slowdown, but fatigue is visible.
The RBI’s policy toolbox for reviving growth is limited, with interest rate management being the most potent lever. But further rate cuts have diminishing returns, just as rate hikes have limited and lagged effects on inflation control. Another cut cannot be ruled out, yet a 25 basis point reduction is unlikely to counter an aggressive US president intent on getting his way.