Repo rate may be eased by 75-100 bps with inflation staying benign | Current Affairs | Vision IAS

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Repo rate may be eased by 75-100 bps with inflation staying benign

3 min read

Impact of US Tariffs on India and RBI's Monetary Policy Response

To counteract the impact of reciprocal tariffs imposed by the US, which are expected to slow economic growth, the Reserve Bank of India (RBI) may contemplate a significant reduction in the policy repo rate by 75-100 basis points (bps). This consideration comes as inflation is anticipated to remain benign, according to brokerage firms.

Recent and Expected Monetary Policy Actions

  • The RBI’s Monetary Policy Committee (MPC) had previously reduced the repo rate by 25 bps in February, marking the first such reduction in five years.
  • It is anticipated that in the upcoming meeting for the financial year (FY26), the MPC will cut the repo rate by an additional 25 bps.

Economic Growth Impact and Forecasts

  • Economists at Goldman Sachs forecast a 30-bp drag on India’s growth due to these tariffs, with an additional 20-bp drag from a slowdown in services export.
  • Goldman Sachs predicts an additional 50 bps of monetary policy easing in CY25, with 25 bps cuts in Q2 and Q3, totaling 100 bps of repo rate cuts in this cycle.
  • They also anticipate a 10-bp growth boost from easier liquidity conditions and another 10-bp boost from lower oil prices.

US Tariff Implications and Comparative Advantages

  • The US has proposed a 26% reciprocal tariff on India, effective from April 9, which although higher than market expectations, is lower than the tariffs on India’s Asian peers, offering some advantage.
  • The higher tariffs on other economies could result in increased dumping into India, leading to lower inflation as per a State Bank of India (SBI) report.

Additional Economic Insights

  • UBS suggests a further 50 bps cut in the repo rate is possible after the 25 bps easing in February, with expectations of continued monetary policy support through rate cuts, liquidity, and regulatory easing.
  • The rate cut in February followed a significant 250 bps increase between May 2022 and February 2023, with the domestic rate-setting panel shifting its stance from "withdrawal of accommodation" to "neutral" in October last year.

Potential Risks and Future Outlook

  • Emkay Global highlights the risk to achieving 6.5% growth in FY26, citing potential global recession risks if tariffs persist, leading to a disinflationary impulse for Indian industry due to lower global commodity prices and a supply glut of goods.
  • The report also notes that India, although impacted less than some peers, is expected to face challenges similar to those in Emerging Markets (EM) Asia during a cyclical downturn, requiring central banks like the RBI to navigate various financial market pressures.
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  • Repo Rate
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