RBI has done its bit: Fiscal and trade policy moves must do the rest

Yet, this global backdrop loomed large over RBI’s policy call as India’s central bank rightly persisted with ‘more of the same.’ It continued to lean towards nurturing growth. It cut the repo rate again by 25 basis points to 6%, having delivered its first rate cut since May 2020 in its last policy review two months earlier. In the period since, it has also continued to pour liquidity into the system through a cash reserve ratio cut, open market operations, variable repo rate auctions and swaps, while going soft on macro prudential tightening.

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What else has RBI done?: It has finally changed its stance from “neutral" to “accommodative," accompanied by a clarification from Governor Sanjay Malhotra that this should be seen only in conjunction with rates and not be confused with its approach to liquidity management. This reaffirms that its next move will only be either another rate cut or the status quo, whereas the earlier stance implied that RBI could also hike its policy rate, which is now very unlikely. This will provide much needed clarity for policy transmission, so that bank deposit and lending rates also soften.

The central bank lowered its 2025-26 projections for growth and inflation to 6.5% and 4% respectively. Importantly, the governor averred that there has been a “decisive improvement in outlook" that makes a “durable alignment" with its inflation target visible. This will provide markets comfort and open up space for deeper rate cuts, with analysts expecting up to 100-150 basis points cumulatively, to support credit growth and negate any effects of a global crisis.

Skymet, a private weather forecasting agency, has forecast a ‘normal’ monsoon this year with rainfall at 103% of its long-period average, which means lower food-inflation risk. Lower global crude oil prices will also depress headline inflation, but the government has raised excise duty on petrol and diesel by ₹2 per litre, reducing the benefit. As for the rupee, a modest depreciation bias could be helpful, given the range of global trade and capital-flow uncertainties arising from a US policy ‘reset’ that may hurt US exceptionalism and induce dollar weakness in time to come.

Also Read: RBI Policy: Domestic growth takes priority amid global uncertainties

The extension of co-lending from just priority-sector loans to all loans is a timely step for spurring credit growth. There are also a few important additional measures. The National Payments Corp of India has been given the freedom to revise UPI transaction limits for person-to-merchant transactions, there are measures enabling the securitization of stressed assets and also guidelines on partial credit enhancement by regulated entities.

Let’s turn to fiscal and trade policy: True, India has some domestic growth drivers and RBI’s proactive rate cuts and liquidity provisions could help absorb external blows, but the need for broader policy support has risen dramatically. Monetary policy alone will not suffice as a lever, given the current situation.

Ongoing tariff and counter-tariff volleys have sucked out vitality and infused huge uncertainty globally. The trillion-dollar question now is: Will there be a US-led global recession as the US goes back in time to impose debilitating Great Depression-era tariffs? China’s retaliation has aggravated market fears and asset markets have gone into spasms of anxiety. If China goes on to use yuan devaluation to counter the US tariff, then a global trade war may morph into a global currency war, with India and its rupee getting dragged in, as I had argued in an oped for Mint last year.

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Slower growth is clearly on the cards, as the tariff war will weigh on business sentiment, output and trade. Second-order impacts on investment and capex sentiment, with discretionary consumption getting postponed, will also adversely impact growth. These, in turn, will have an immediate impact on businesses via production and exports.

In reality, an extrapolation of the current gloomy state of affairs over the longer term may not be appropriate. A complete pass-through of tariffs seems unlikely and we can expect some sort of truce or negotiated deals going forward. Hence, a US recession in the near term is still a relatively low-probability event for now (though this could change quickly).

Also Read: Doom loop: Stagflation is the best scenario a tariff-hit US can expect

There remains significant uncertainty over changes in global trade patterns and the likely ‘winners and losers’ on the basis of reciprocal tariffs, given the complexity of global supply chains, and the deals countries strike with the US. Hence, we need our fiscal and trade policies to respond more forcefully. They must not only contain the damage, but also take advantage of any ‘tariff arbitrage’ opportunities that may arise and aid in gaining market share, especially in sectors such as electronics, textiles, pharma and defence.

India’s policymakers should double down on government spending, initiate trade reforms and pursue deregulation with alacrity. They must also expedite trade talks and bilateral agreements with various countries and market blocs. Importantly, both the government and Indian industry will need to remain watchful of any dumping from China that could hurt investments, exports and the pricing power of businesses in key sectors.

The author is group chief economist at Larsen & Toubro.