India's central bank cuts rates as US tariffs add to growth risk

The Reserve Bank of India (RBI) has today lowered its key repo rate for a second consecutive time and changed its monetary policy stance signalling room for more cuts ahead, as it seeks to boost the sluggish economy in the face of fresh US tariffs.

India became the second central bank after the Reserve Bank of New Zealand to cut interest rates since the wide-ranging levies were announced.

The tariffs have raised the risk of a global slowdown and a US recession while sparking financial turmoil, leaving emerging market central banks facing a tough choice between cutting rates to support growth and shoring up their fragile currencies.

India's Monetary Policy Committee (MPC), which consists of three RBI and three external members, cut the repo rate by 25 basis points to 6% as expected. It started reducing rates with a quarter-point reduction in February, its first cut since May 2020.

The central bank also changed its stance to "accommodative" from "neutral".

The 26% tariffs announced by the US on imports from India have exacerbated uncertainties but quantifying the impact on growth is difficult, central bank Governor Sanjay Malhotra said in his statement.

"Growth is improving after a weak performance in the first half of the financial year 2024-25, although it still remains lower than what we aspire for," said Malhotra, adding that the inflation outlook is benign.

All six MPC members voted to cut the repo rate.

The change in the policy stance means the MPC is considering only two options, either status quo or a rate cut, and the stance does not directly link to liquidity conditions, he said.

The RBI now estimates growth at 6.5%, slightly lower than its earlier estimate of 6.7%. It sees inflation at 4% compared to 4.2% earlier.

"In such challenging global economic conditions, the benign inflation and moderate growth outlook demands that the MPC continues to support growth," the committee said in its written statement.

Economists estimated growth in the world's fifth-largest economy could be hit by 20-40 basis points in the current fiscal year due to the direct and indirect fallout of higher tariffs.

"We see growth undershooting the RBI's estimates and expect it at 6.3% for the fiscal year 2026," Sakshi Gupta, principal economist at HDFC Bank said.