India-US trade deal changes RBI monetary policy outlook: BofA explains why rate cut cycle may be over now

Amid the finalisation of the India-US deal, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) will likely keep the gunpowder dry at the upcoming policy meeting, scheduled during February 4-6, according to global brokerage Bank of America (BofA).

BofA believes that the trade deal boosts growth outlook, reducing the need for further repo rate cuts by the RBI MPC, also marking a possible end to the rate-cut cycle for now. The MPC may retain a neutral policy stance.

"…while there is space for the MPC to provide a growth supportive rate cut, it remained contingent on India achieving a trade deal with the US, which has remained one of the key sources of uncertainty for the growth outlook. The deal now would boost the growth certainty, and the current momentum seen in high-frequency indicators can continue to sustain."

BofA, therefore, changed its rate cut call of 25bps to HOLD for the upcoming Feb 6th meeting, it said in a report dated February 3. RBI has cumulatively eased the repo rate by 125 bps from the peak over the last year or so, bringing it lower to 5.25%.

"We also believe RBI is now done cutting rates but will continue to manage its liquidity provisions carefully to ensure rate transmission remains active,” it added.

Earlier, BofA had projected that there was room for the MPC to deliver another 25 bps rate cut, but only if uncertainty around India’s trade negotiations with the US persisted. With the deal now finalised, that uncertainty has effectively disappeared.

BofA decodes India-US trade deal impact

The White House on Monday evening announced it will roll back tariff penalties on India, which were in place since August 2025, for importing Russian crude oil (25%), and a reciprocal tariff of 25%, down to 18% cumulatively.

According to the brokerage, the US announcement that India will stop purchasing Russian crude oil and instead expand purchases from the US and Venezuela, while lowering tariffs on Indian goods, adds a geopolitical as well as economic dimension to the deal.

The top-line tariff rate falling to 18% gives India a competitive footing in global trade, especially as earlier effective tariff levels had reached as high as 30–35% once sectoral duties were factored in.

Effective tariffs may drop sharply to 12–13%

One of the most significant takeaways from the trade pact is the estimated drop in effective tariff burden on Indian goods. While the headline tariff rate is now 18%, BofA estimates that even after factoring in Section 232 duties on steel, aluminium, and automobiles, the effective tariff rate could fall to around 12–13%, down sharply from nearly 30–35% earlier.

“Post today’s announcements, we estimate that even without accounting for the rupee weakness persisting to some extent, the impact of 18% tariffs will be blunted, but by our estimates, accounting for section 232 tariffs on all products like steel, aluminum and automobiles staying in place, we estimate the effective tariff rate on India might be just around 12-13% as per our estimates, down from almost 30-35% previously."

It highlighted that this would provide significant relief to India’s export sector, especially labour-intensive areas such as gems & jewellery, textiles, agricultural products and engineering goods.

The brokerage also sees growth upside risks to India’s FY27 GDP projections of 6.8%, but will undertake a thorough review before making any changes.

"We already see reasonable growth in high-frequency indicators, and expect GDP growth to benefit further from this trade breakthrough,” BofA stated.

This improvement in export economics reduces downside risks to GDP growth and strengthens external sector stability — both of which are key inputs into RBI’s policy framework.

In essence, the trade deal has removed one of the biggest overhangs on India’s growth outlook.

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