US tariffs may stoke inflation and make rate cuts harder, says RBI
Even as India’s economic outlook remains “resilient”, risks from evolving tariff actions, adverse weather events, and volatile global financial markets are expected to hamper growth and disinflation, the central bank said.
US tariff hikes have increased the risk of supply-chain disruptions, which could impede the ongoing disinflation and make it harder to ease monetary policy, the Reserve Bank of India (RBI) warned in its semi-annual monetary policy report released on Wednesday.
“For emerging market economies, the external environment poses several challenges, including weak global growth, high tariffs, heightened uncertainty, volatile capital flows, and geopolitical tensions," the report noted.
Even as India’s economic outlook remained “resilient", risks from adverse weather events, evolving tariff actions, and volatile global financial markets were expected hinder growth and disinflation, the RBI said.
Projections cut
Concerns around external risks were reflected in the GDP projections of the monetary policy committee, which kept the repo rate unchanged at 5.5%. Though the RBI raised its full-year growth forecast to 6.8% from 6.5%, thanks to higher-than-expected growth of 7.8% in Q1 and expectations of 7% growth in Q2, it projected weaker growth in the second half. It cut the growth forecast for Q3 by 20 basis points to 6.4%, and for Q4 by 10 basis points to 6.2%.
The report said the recent GST cuts were expected to boost domestic demand and output, and could mitigate the adverse impact of US tariffs. However, it also noted an increase in inflation in the March quarter, albeit due to an adverse base. While it lowered its full-year inflation projection by 50 basis points to 2.6%, Q4 inflation is still seen touching the medium-term target of 4%.
Weaker rupee, higher fiscal deficit
The RBI made some changes to its broad assumptions in the latest report compared to the one in April. It assumed an exchange rate of ₹88 per dollar for the second half of the year, as against 86 per dollar in its April projection for FY26. “The rupee remained range-bound in Q1 but came under depreciating pressures in Q2," the report noted.
The RBI’s assumptions on the overall fiscal deficit also changed, even though it expects the union government to meet the budget estimate of 4.4% of GDP despite tax cuts. It assumed the overall (central plus states) fiscal deficit to be 7.4%, or 30 basis points higher than its April’s assumption. This signalled growing concern about states’ fiscal condition due to revenue loss from GST cuts.
Consumption growth
On the consumption front, the report said there was strong momentum in Q1, which helped push overall growth higher. Even as high-frequency indicators continued to paint a mixed picture, with domestic air traffic and passenger vehicle sales falling in August, there were signs of a recovery, it said.
“The consumer durables output expanded at a strong pace in July 2025, while the sales of fast-moving consumer goods in urban areas improved during July-August," the report said.
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