India’s Reserve Bank of India (RBI) took a significant step on April 9th, 2025, cutting its policy interest rate by 25 basis points to 6%. This marks the second consecutive rate cut and brings the rate to its lowest level since September 2022. The move comes as the Indian economy faces a confluence of challenges, including slowing growth and the implementation of US reciprocal tariffs.
The decision aligns with analysts’ predictions and aims to counteract the weakening economic momentum. India’s GDP growth slowed to a weaker-than-expected 6.2% in the fourth quarter of 2024, and forecasts for the fiscal year ending March 2025 point to a further deceleration to 6.5%. This represents a substantial drop from the 9.2% growth recorded the previous year. The newly imposed US tariffs, adding a 26% levy on Indian goods, are expected to further dampen growth, potentially reducing it by 0.5 percentage points for the fiscal year ending March 2026, according to HSBC. This impact could be even more significant due to indirect effects on exports and foreign investment.
Despite the rate cut, the RBI’s move is not without its complexities. While inflation has cooled recently, reaching its lowest level since July 2024 at 3.61% in February, concerns remain. The ongoing heatwave in India threatens agricultural output, a crucial sector representing 18% of the country’s economy. Experts like Sanjay Mathur of ANZ have highlighted significant downside risks to India’s GDP growth, suggesting that a figure below 6% is a real possibility given current global economic uncertainties.
The RBI’s strategy appears to be a calculated risk, balancing the need to stimulate economic activity with the potential inflationary pressures. HSBC anticipates inflation to average around 3.5% in the next six months, driven primarily by lower food prices. The bank also points to the rupee’s recent appreciation, disinflation from China, lower oil prices, and weaker domestic growth as contributing factors to a softer core inflation outlook. The coming months will be crucial in determining the effectiveness of this rate cut and whether it successfully counteracts the challenges faced by the Indian economy.
