Trade uncertainty overshadows the economy, India's RBI cuts interest rates by 50 basis points beyond expectations

Source: Wall Street News

Faced with trade uncertainty caused by Trump's tariff policy and pressure of slowing domestic economic growth, the Bank of India (RBI) unexpectedly announced a sharp cut of 50 basis points, far exceeding market expectations.

On Friday, June 6, the Monetary Policy Committee of the Bank of India decided to lower the benchmark repurchase rate by 50 basis points to 5.5%, which is the third consecutive rate cut since February 2025, and the cumulative interest rate cut this year has reached 100 basis points. Meanwhile, the RBI lowered its reserve requirement ratio by 100BP to 3%, with an expected 4%.

According to Bloomberg, only one out of the 34 economists surveyed predicted such a radical rate cut.

In a television speech in Mumbai, the Governor of the Bank of India, Sanjay Malhotra, said inflation had “significantly fallen” to far below the target level, and the near-term economic outlook gives the central bank confidence that inflation will be aligned with the target on a sustainable basis. Data shows that India's retail inflation rate has fallen to 3.16% in April, a record low in the past six years, far below the central bank's 4% medium-term target.

After the interest rate cut, Indian bonds rose and stock market gains narrowed. India's 10-year Treasury bond yield fell 6 basis points to 6.19%. India's 5-year Treasury yield fell 14 basis points and is currently at 5.68%.

Economic growth under pressure: trade clouds

India's economy slowed to 6.5% in the fiscal year ended March, putting pressure on policymakers to stimulate growth. Although data showed that India's GDP growth in January-March quarter still reached 7.4%, the escalating trade tensions and global growth concerns caused by the Trump administration's tariff policy suggest that the central bank may need further relaxation.

The easing of consumer price growth has also allowed the RBI to shift its focus to boosting domestic demand, a policy adjustment that is particularly important in the context of increasing global trade uncertainty.

With the 90-day "tariff grace period" set by the United States due to expire in July, India is accelerating trade negotiations with the United States. Previous media reports that India is discussing a three-phase trade agreement with the United States, with the first phase striving to reach a temporary agreement by early July. This temporary agreement may cover market access for industrial products, some agricultural products, and the solution of non-tariff barriers such as quality control requirements.

It is worth noting that the RBI also adjusted its monetary policy stance from "loose" to "neutral", and Malhotra said further actions will depend on upcoming data.

This subtle change implies that while actively stimulating the economy, the RBI is also reserveing room for future policy flexibility.

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