RBI's Monetary Policy and Tariff Uncertainties
The Reserve Bank of India's (RBI) Monetary Policy Committee decided to pause its rate cuts, as announced on August 6, 2025. This decision was sensible given the current economic uncertainties.
Uncertainties Surrounding Tariffs
- A 100 basis point (bps) rate cut since February 2025 is still filtering through the financial system.
- Additional tariffs by the U.S. on Indian imports are anticipated, with potential penalties for India's oil purchases from Russia.
- India is engaged in negotiations for a Bilateral Trade Agreement with the U.S., with final tariffs pending.
Monetary Measures and Economic Growth
- The RBI's pause allows assessment of the monetary measures' effectiveness.
- Ample liquidity exists in the banking system, but growth-related borrowing is a concern.
- Key data highlights:
- Consumer durable loans contracted by 3% by end-June compared to the previous year.
- Housing loan growth slowed to 9.6%, down from 36% the previous year.
- Vehicle loans also saw a decrease in growth rate.
- Industry loans grew by 5.5% in June 2025, a drop from 8.1% the previous year.
Need for Stronger Policy Frameworks
- The RBI governor emphasized the importance of robust policy frameworks beyond monetary policy.
- Government intervention should be more focused than merely increasing capital expenditure.
- Recommended actions include:
- Goods and Services Tax (GST) rate rationalization.
- Reducing fuel prices in response to lower oil prices to boost consumer sentiment.
While the RBI can afford to take a wait-and-see approach, the government must take more immediate action.
