The recent decision by India’s central bank to cut interest rates reflects a response to shifting economic conditions marked by external pressures, notably from international trade disputes. On April 9, 2025, the Reserve Bank of India (RBI) reduced the repo rate by a quarter of a percentage point from 6.25% to 6.0%. This marks the second rate cut since February of this year, reversing a trend that had persisted for nearly five years. The repo rate, which is the rate at which the central bank lends funds to commercial banks, serves as a critical tool in regulating the economy and influencing borrowing costs for businesses and individuals alike.
In addition to the interest rate cut, the RBI revised its growth projections, reducing expectations for the current fiscal year’s economic expansion from 6.7% to 6.5%. These measures reflect serious concerns regarding the impact of tariffs introduced during Donald Trump’s presidency, which fundamentally altered trade dynamics and put India’s growth outlook at considerable risk. The central bank’s shift in stance from “neutral” to “accommodative” signifies a readiness on the part of the RBI to initiate further rate cuts should the need arise, thereby facilitating a more supportive environment for economic growth.
RBI Governor Sanjay Malhotra articulated the concerns regarding escalating trade tensions, citing that the predictions of sluggish global trade were materializing, leading to increased uncertainty for the economic landscape. This sentiment is echoed by various economists, who had initially forecasted a limited number of rate cuts. However, the prevailing view has now shifted significantly towards anticipating multiple cuts exacerbated by the trade war initiated by the former U.S. administration.
The extent of potential cuts—reported by analysts at ICICI Bank to possibly reach up to 1%—is indicative of the deepening economic malaise, as moderating inflation may grant the RBI additional leeway to adjust borrowing costs. Coinciding with these developments, HSBC’s assessments suggest that India’s GDP could suffer a substantial decline of up to half a percent this financial year due to decreased global demand and diminished foreign capital inflows.
The Indian government finds its capacity to stimulate the domestic economy hampered, as recent months have seen stagnation in both spending and tax revenues. Notably, starting from mid-April, Indian exports to the United States face additional tariffs as high as 27%, which compounds the difficulties arising from an uncertain global economic climate. Compared to other Asian nations, India’s tariffs are relatively moderate, with higher rates imposed on China, Vietnam, and Cambodia.
The implications of these tariffs hinge significantly on the duration of their implementation and the reactions of other nations. For instance, China has already enacted reciprocal tariffs on U.S. goods, while European nations deliberate on equivalent countermeasures. In contrast to its regional counterparts, India appears to be taking a more cautious approach, focusing on solidifying a trade agreement with the United States. Indian Foreign Minister S. Jaishankar affirmed this commitment recently, emphasizing the value of resolving the Bilateral Trade Agreement swiftly.
Despite the intent to secure a favorable trade relationship with the U.S., the Indian economy must still grapple with external slowdowns that could curtail export demand. Expectations of a global recession loom large, with banks like JP Morgan positing a 60% chance, while Moody’s has increased the likelihood from 15% to 35% due to ongoing tariff disputes.
While India currently retains its status as the fastest-growing major economy at 6.5%, this figure represents a notable decline from the 9.2% growth recorded in the prior fiscal year, indicating that economic challenges remain prevalent. In summary, the RBI’s recent decisions reflect strategic attempts to navigate a complex interplay of domestic and international economic pressures, with implications that extend beyond India’s borders as trade tensions and global growth forecasts continue to evolve.