MPC responds to tariff war with 25 bps rate cut, accommodative policy stance

India may grow slower than previously expected this fiscal year, the central bank's monetary policy committee (MPC) said, at a time the world is bracing for a slowdown resulting from trade tensions. The committee shifted gears to support growth with a 25 basis repo rate cut and change in policy stance to accommodative, as inflation risks recede and US tariffs trigger global uncertainties.

"We have reduced the growth rate (outlook) by 20 basis points this year primarily arising out of the uncertainties," Malhotra said at a press conference. "All in all, more than inflation, we are concerned about its impactongrowth," he said. Tariffs were expected to impact India's goods exports, but India was relatively better placed than some other countries, he added.

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While the unanimous decision to cut repo rate to 6% was expected, the change in policy stance came as a surprise. Only three out of 10 economists polled by Mint expected a change in policy stance to ‘accommodative’ from ‘neutral’. An accommodative stance indicates the central bank is ready to support growth by cutting rates.

"The stance of monetary policy signals the intended direction of policy rates going forward. Accordingly, with respect to the policy rate, which is the mandate of the MPC, today’s change in stance from ‘neutral’ to ‘accommodative’ means that going forward, absent any shocks, the MPC is considering only two options – status quo or a rate cut," the governor said in his policy statement.

The MPC also trimmed its growth and inflation forecasts for FY26 by 20 basis points each to 6.5% and 4%, respectively. The committee noted improving domestic conditions, while pointing to risks from global trade disruptions due to tariffs.

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The MPC also said there has been a decisive improvement in the inflation outlook, revising its inflation projection for three out of four quarters in FY26 beneath its 4% target. "As per projections, there is now a greater confidence of a durable alignment of headline inflation with the target of 4% over a 12-month horizon," Malhotra said.

The governor also added that the central bank will ensure sufficient surplus cash to aid the transmission of rate cuts into the financial system, indicating it may keep liquidity at around 1% surplus of net banking deposits. On Tuesday, India's banking system had a surplus liquidity of ₹1.33 trillion.

Industry reaction

“The RBI rate cut coupled with the revision in stance to accommodative was a swift, timely move, and a forward guidance to the market to stay supportive against evolving global uncertainties. The revision of stance to accommodation will cushion the secondary impact of tariffs on domestic economy. With inflation under check, growth imperatives will take precedenceinFY26," said C.S. Setty, chairman, State Bank of India.

Gaura Sen Gupta, chief economist at IDFC FIRST Bank expects further infusion of ₹4 trillion of durable liquidity in FY26. According to estimates, RBI has infused liquidity worth ₹7.2 trillion through various tools like open market operations (OMOs), variable repo rate (VRR) and dollar buy-sell swaps since 27 January.

While Malhotra made it clear that policy rates are headed downwards, he quipped that he was not Sanjaya of Mahabharata to have a “divine vision" on how far interest rates will fall. Economists, however, expect more softening this year, with some seeing the repo rate down by as much as 100 basis points to 5%.

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"The benign outlook on inflation (favourable monsoon, lower crude oil prices to offset rupee depreciation) and downside risks to growth will provide room for a deeper rate cut cycle (75-100 bps), bringing the real interest rates to around 100-125 bps. Furthermore, to ensure adequate monetary transmission, we expect the RBI will keep liquidity conditions ample to anchor the overnight rate closer to the repo rate," said Upasna Bhardwaj, chief economist, Kotak Mahindra Bank.

Following this rate cut, banks look poised to reduce their deposit rates and lending rates. Kotak Mahindra Bank on Wednesday revised its fixed deposit rates lower by up to 15 basis points across select tenures.

According to RBI data, the weighted average domestic term deposit rate stood at an eight-year high of 6.9% in FY25. For February, the figure touched a nine-year high of 7.02%. Only a few banks like Bank of Baroda, Yes bank and HDFC Bank had reduced their deposit rates after the February rate cut.