Shockwaves from Trump’s tariff war lap at MPC’s door

Worries about the global tariff war hung over the Monetary Policy Committee's (MPC) meeting earlier this month, minutes of the meeting released on Wednesday showed. Members pointed to the potential impact of tariffs on India's growth, as they made the case for a lower repo rate and a change in policy stance.

The six-member rate-setting panel on 9 April voted unanimously for a 25 basis points repo rate cut and a change in policy stance to accommodative, with an aim to support growth. The committee also lowered the growth forecast for FY26 to 6.5% from 6.7% earlier.

An uncertain global environment has amplified downside risks to growth, Reserve Bank of India (RBI) governor Sanjay Malhotra said at the meeting. However, he was more optimistic than other MPC members about impact of tariffs on India's growth outlook.

Also read | ICICI Bank sees RBI repo rate cuts impacting margins

"The Indian economy remains relatively less exposed and better-placed to withstand such spillovers, with its growth driven largely by domestic demand. Nevertheless, we are not immune to the aftershocks and ripple effects associated with global disturbances. There may also be some positive spin-off to the Indian economy from the likely softening of crude oil and commodity prices and relative tariff advantage," said Malhotra.

The International Monetary Fund (IMF) on Tuesday cut its FY26 growth forecast for India to 6.2% from the previous 6.5%, while the World Bank on Wednesday reduced it to 6.3% from 6.7%. 

At the MPC meeting, RBI deputy governor Rajeshwar Rao expressed greater caution about the potential impact of tariffs on trade, financial markets and domestic economic activity.

"While the inflation outlook remains benign, GDP growth could face downward pressure. The recent waves of global uncertainty demand decisive policy support to growth," said Rao.

Read this | Banks slash deposit rates taking cue from RBI’s repo cut

External MPC member Nagesh Kumar agreed that India's growth prospects could be affected adversely, and that there is a greater need for stimulating private consumption and investments through fiscal and monetary policy to sustain the growth momentum.

"Given the need to support growth through private consumption and investment, we should continue with further repo rate cuts. One could be more ambitious and target a 50 basis point cut, which, in my view, may be more effective than two cuts of 25 basis points each. However, given the global uncertainty, we can go about it cautiously in a phased manner," said Kumar.

External member Ram Singh stressed the need to be cautious while focusing on domestic priorities regarding inflation and growth.

"The external sector remains resilient; however, uncertainties remain high in the wake of the recent spike in global uncertainties, which are likely to dampen merchandise exports while services exports are expected to remain resilient. Headwinds from global trade disruptions pose a downward risk to the growth rate," said Singh.

Also read | What RBI’s proposed norms mean for co-lending, gold loans

According to external member Saugata Bhattacharya, global slowdown could spill over into India via external channels if trade tariff actions are not significantly diluted.

"India’s FY26 external balance might also become a matter of concern. Trends in India’s (goods and services) trade will need close monitoring, and the trade balance will depend inter alia on the responses of domestic households to their consumption-savings decisions if growth does indeed slow. Capital inflows and remittances might also be adversely affected," said Bhattacharya.

MPC member Rajiv Ranjan, also an RBI executive director, said the changed stance indicates the formidable headwinds facing domestic growth from heightened global uncertainties.

"With the global rules of the game changing, India is bound to get affected through several channels. Even as India remains essentially domestic demand driven, the drag to growth may come from the global front, through lower external sector contribution and high investment uncertainty," said Ranjan.

In its State of the Economy report released on Tuesday, RBI officials said the Indian economy could remain less affected by global trade wars than other countries as the engines of domestic growth — consumption and investment - could be less impacted by external headwinds.

And read | Mint Explainer: How RBI's latest rate cut, change in stance impact borrowers, depositors