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India’s central bank held its key interest rate as Donald Trump’s planned increase in tariffs on the country’s exports to the US threatens to send its economy into turmoil.
The Reserve Bank of India’s decision on Wednesday to keep the repo rate at 5.5 per cent was in line with most economists’ expectations. The central bank cut the rate by a higher than expected half percentage point in June to boost economic growth, taking the total reduction since the start of the year to 1 percentage point.
Trump last week imposed a 25 per cent tariff on imports from India, a higher level than faced by many regional peers, after prime minister Narendra Modi’s government failed to conclude a trade deal with Washington ahead of the US president’s August 1 deadline.
The US president has since threatened to announce additional levies on India as early as Wednesday to punish New Delhi for importing cheap Russian oil, as he excoriated the country’s “dead” economy.
The central bank decided to hold the rate as “the uncertainties of tariffs are still evolving, monetary policy transmission is still continuing [and] the impact of the 100 basis-point rate cut since February 2025 on the broader economy is still unfolding”, RBI governor Sanjay Malhotra said on Wednesday.
The RBI also stuck with its 6.5 per cent GDP growth forecast for the fiscal year ending next March. “Headwinds emanating from prolonged geopolitical tensions . . . persisting global uncertainties and volatility in global financial markets pose risks to the growth outlook,” Malhotra said.
At a press conference later on Wednesday, the RBI governor said the impact of Trump’s new tariffs had not yet been factored into economic projections, adding: “We do not have sufficient data to revise our GDP forecast.”
Goldman Sachs has estimated that the 25 per cent tariff could reduce India’s annual GDP growth by 0.3 percentage points.
India’s inflation rate has continued to ease, falling to a six-year low of 2.1 per cent in June.
Trump has also pressured New Delhi to stop buying cheaper Russian crude, which constitutes 40 per cent of India’s oil imports. Malhotra said the impact on inflation of such a move would depend on how much of the additional cost the government was able to absorb through excise duties or other levies.
“Of course crude is an important element in determining our inflation,” he said. “I think the government . . . will take an appropriate decision on the fiscal side, in case there is any shock.”
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As the country prepares for further tariffs, the central bank has been selling dollars, according to multiple people familiar with the matter, to curb the pressure on the rupee, which has been trading close to record lows
“It’s obvious the RBI is intervening to curb the volatility,” said one Mumbai banker. The central bank did not respond to a request for comment.
Dilip Parmar, senior research analyst at HDFC Securities, said that “caution persists” around the currency “amid ongoing foreign fund outflows and trade uncertainties”.
Those factors, along with a range of economic indicators slipping into single-digit growth, including credit growth, exports, and corporate earnings, signal weakness in the economy and strengthen the case for further rate cuts, according to analysts at Nuvama Institutional Equities.
