US tariffs identified as a significant hindrance to India's economic growth, while a favorable inflation forecast is indicated

Reserve Bank of India Maintains Neutral Stance Amidst Economic Uncertainties

In a recent meeting, the Reserve Bank of India (RBI) decided to keep its key repo rate at 5.50% and maintain a neutral stance, as reported in the minutes of the August meeting. This decision comes amidst a drop in India's retail inflation rate to its lowest level in eight years, reaching 6.04% in July.

Deputy Governor Poonam Gupta noted that the drop in inflation was primarily driven by falling food prices, especially vegetables and pulses. However, she also cautioned that the moderation in inflation was not broad-based, with core inflation likely to remain above 4% in the near to medium term. External member Ashima Goyal, on the other hand, views inflation as currently elevated but largely driven by supply-side factors, advocating for a cautious and data-driven approach to monetary policy tightening.

RBI Governor Sanjay Malhotra expressed concern about uncertainties in external demand, driven by tariffs and geopolitical tensions, as a major drag on growth. He noted that the projected growth of 6.5% is resilient, but lower than what could be achieved. Malhotra also highlighted the potential 50% tariffs on exports to the United States starting August 27 due to U.S. President Donald Trump’s additional 25% tariff on imports of Russian oil.

MPC member Ram Singh stated that the average CPI inflation outlook for 2025-26 had become "very benign". However, he also expressed concern about high uncertainty on both inflation and growth fronts. Singh was joined by other MPC members in flagging evolving risks from global trade tensions and tariffs as a key drag on growth.

In a move to stimulate the economy, the RBI made a 100 basis points cut in rates earlier in 2025. External member Saugata Bhattacharya highlighted the trade-off between loan and deposit rates as one of the key considerations for monetary policy. He suggested that the case for stimulating private investments and urban demand remains strong.

Despite the economic challenges, Malhotra noted a larger-than-expected moderation in food inflation since the June meeting. The RBI's neutral stance aims to provide the necessary flexibility to respond to changing conditions, as the central bank prepares to report GDP growth data on August 29.

Kumar, another MPC member, suggested waiting before looking at any policy decisions at the October meeting due to trade policy uncertainties. Malhotra also cautioned that uncertainties around tariffs are still evolving, adding to the economic uncertainties facing the country.