RBI policy pause likely as trade, tariff uncertainties cloud growth outlook
September 28, 2025
With GDP growth estimated at around 6.5% for FY26, the central bank may not need further rate cuts. However, if America's steep 50% tariff persists for long, and growth outlook worsens, the central bank could consider a rate cut later during the year.
With a 50% duty imposed by the US, India has become one of the highest tariffed nations. Exports to the US constitute only around 2% of India’s GDP. Nevertheless, with this high tariff, India’s exports will feel a big blow. The annual impact of the 50% tariff could be as high as 0.8-1% of GDP.
While goods exports were already reeling under tariff pressure, the recent announcement by US of higher H-1B visa fees and the proposed HIRE Act (Halting International Relocation of Employment), which seeks to curb outsourcing by US companies, could cast a shadow on services exports too. India is in the midst of negotiating a trade deal with the US, and that could result in tariffs being reduced. However, so far there is no further clarity on this and uncertainty continues to linger.
Even with exports feeling the pinch, we estimate India’s current account deficit to GDP to remain comfortable at around 0.9% (base case scenario) and even with higher risk, it may worsen only to around 1.3% in FY26. India’s current account deficit is being supported by healthy services exports, remittances and benign global crude oil prices.
Capital flows have been adversely impacted by persistent FII outflows from the equity market and feeble net FDI flows. Capital flows are likely to remain volatile amid global uncertainties. However, India’s high forex reserves of around $700 billion is a comfort.
With external outlook worsening, the government is trying measures to boost domestic demand. The recent GST rationalization is a step in the right direction, and should help bolster domestic consumption and reduce inflation.
The government may also consider targeted support to some of the affected export sectors like textiles, ready-made garments, gems & jewellery and seafood. Overall, we expect India’s GDP growth at around 6.5% in FY26, based on the assumption that the additional punitive tariff of 25% will be removed soon. However, GDP growth could fall closer to 6%, if the 50% tariff stays longer.
CPI (consumer price index)-based inflation is under control, with the average inflation for the last three months at 1.9%. The sharp fall in inflation in the last few months is because of moderation in food prices, and the statistical impact of high base of last year. CPI inflation is likely to average a benign 2.7% in FY26, after incorporating the GST rate cut impact.
However, next year, we will see inflation rising again, as the base effect reverses. The inflationary outlook will also be dependent on the monsoon situation next year. We expect CPI inflation to breach 4% level in Q4 FY26 and average around 4.5% in FY27, assuming a normal monsoon.
Looking beyond the recent temporary tightness, broadly, the system liquidity was ample in the last few months. We saw call rate hovering below the policy repo rate. Apart from further infusion of liquidity in the system through the CRR (cash reserve ratio) cut, the RBI may continue to intervene as required to maintain ample liquidity in the system and ensure smooth transmission of the rate cuts so far.
Given that the policy rate has already been cut by 100 bps and the CRR by a huge 1% in the current year, the central bank may decide to wait and get further clarity on US trade policy and impact on Indian economy.
With GDP growth estimated at around 6.5% for FY26, the central bank may not need further rate cuts. With repo rate at 5.5% and inflation estimated at 4.5% for next year, the real rate of interest will be around 1% and, hence, further stimulus may not be required. However, if the high tariff scenario persists and growth outlook worsens, the central bank could consider a rate cut later during the year.
While goods exports were already reeling under tariff pressure, the recent announcement by US of higher H-1B visa fees and the proposed HIRE Act (Halting International Relocation of Employment), which seeks to curb outsourcing by US companies, could cast a shadow on services exports too. India is in the midst of negotiating a trade deal with the US, and that could result in tariffs being reduced. However, so far there is no further clarity on this and uncertainty continues to linger.
Even with exports feeling the pinch, we estimate India’s current account deficit to GDP to remain comfortable at around 0.9% (base case scenario) and even with higher risk, it may worsen only to around 1.3% in FY26. India’s current account deficit is being supported by healthy services exports, remittances and benign global crude oil prices.
Capital flows have been adversely impacted by persistent FII outflows from the equity market and feeble net FDI flows. Capital flows are likely to remain volatile amid global uncertainties. However, India’s high forex reserves of around $700 billion is a comfort.
With external outlook worsening, the government is trying measures to boost domestic demand. The recent GST rationalization is a step in the right direction, and should help bolster domestic consumption and reduce inflation.
The government may also consider targeted support to some of the affected export sectors like textiles, ready-made garments, gems & jewellery and seafood. Overall, we expect India’s GDP growth at around 6.5% in FY26, based on the assumption that the additional punitive tariff of 25% will be removed soon. However, GDP growth could fall closer to 6%, if the 50% tariff stays longer.
CPI (consumer price index)-based inflation is under control, with the average inflation for the last three months at 1.9%. The sharp fall in inflation in the last few months is because of moderation in food prices, and the statistical impact of high base of last year. CPI inflation is likely to average a benign 2.7% in FY26, after incorporating the GST rate cut impact.
However, next year, we will see inflation rising again, as the base effect reverses. The inflationary outlook will also be dependent on the monsoon situation next year. We expect CPI inflation to breach 4% level in Q4 FY26 and average around 4.5% in FY27, assuming a normal monsoon.
Looking beyond the recent temporary tightness, broadly, the system liquidity was ample in the last few months. We saw call rate hovering below the policy repo rate. Apart from further infusion of liquidity in the system through the CRR (cash reserve ratio) cut, the RBI may continue to intervene as required to maintain ample liquidity in the system and ensure smooth transmission of the rate cuts so far.
Given that the policy rate has already been cut by 100 bps and the CRR by a huge 1% in the current year, the central bank may decide to wait and get further clarity on US trade policy and impact on Indian economy.
With GDP growth estimated at around 6.5% for FY26, the central bank may not need further rate cuts. With repo rate at 5.5% and inflation estimated at 4.5% for next year, the real rate of interest will be around 1% and, hence, further stimulus may not be required. However, if the high tariff scenario persists and growth outlook worsens, the central bank could consider a rate cut later during the year.