Tariff uncertainty glues RBI in place in August

RBI pauses easing cycle: After cutting interest rates for three straight meetings, at its meeting on 6 August, the monetary policy committee of the Reserve Bank of India (RBI) unanimously decided to maintain its policy rate at 5.50%. Market expectations had been split between a pause and a cut.

Tariff uncertainty drives hold: Inflation has declined in recent months, a factor that drove the RBI to cut interest rates in its last meetings. In June, inflation cooled for the eight month running and hit an over six-year low, pushed down by recently strong harvests. However, the meeting came just before U.S. President Trump’s 7 August deadline for trade talks, sprinkling uncertainty into the outlook for India’s GDP growth and currency, discouraging the RBI from cutting rates further.

The outlook clouds: Our panel is roughly split between those expecting the RBI to cut its policy rate by a quarter-point in October–December and those that expect it to stand pat. In sum, the outlook for rates has become more uncertain, and much hinges on progress regarding India-U.S. trade talks. Since the RBI’s August meeting took place, Trump slapped an additional 25.0% tariff on India, citing its imports of Russian oil and bringing total levies to 50.0%. On the one hand, this suggests interest rates will be lower ahead as India’s outlook for GDP growth and inflation is likely to deteriorate; however, on the other hand, the levies might discourage the RBI from trimming rates as the rupee—which was already trading at record lows—has come under increasing pressure, forcing the central bank to sell at least USD 5 billion so far this month. The RBI’s next meeting is set for 29 September–1 October.

Panelist insight: Analysts at Goldman Sachs said: “We continue to forecast a 25bp further rate cut in Q4 from the RBI […]. Two main risks could alter this view: a rapid and mutually beneficial resolution of the US-India trade negotiations, or a quicker-than-expected rise in core inflation (ex petrol, diesel, gold and silver) towards 4.0%.”

How should you choose a forecaster if some are too optimistic while others are too pessimistic? FocusEconomics collects Indian interest rate projections for the next ten years from a panel of 21 analysts at the leading national, regional and global forecast institutions. These projections are then validated by our in-house team of economists and data analysts and averaged to provide one Consensus Forecast you can rely on for each indicator. By averaging all forecasts, upside and downside forecasting errors tend to cancel each other out, leading to the most reliable interest rate forecast available for Indian interest rate.

Download one of our sample reports to visualize what a Consensus Forecast is and see our Indian interest rate projections.

Want to get access to the full dataset of Indian interest rate forecasts? Send an email to info@focus-economics.com.