Tariff uncertainty prompts RBI to hold again

RBI keeps easing cycle on pause: On 1 October, the monetary policy committee of the Reserve Bank of India (RBI) voted unanimously to maintain its policy rate at 5.50%, keeping on pause the easing cycle it began in February this year, as expected by most economists. That said, the RBI cut its inflation forecasts and its governor made dovish remarks, paving the way for a rate reduction in December.

Uncertainty about impact of tariffs plus tax and interest rate cuts drives hold: In justifying the hold, the RBI said that it needed more time to assess the economic impact of past tax cuts and interest rate reductions, as well as the economic effect of U.S. tariff hikes. This signals a wait-and-see approach, but the RBI is still likely to resume its easing cycle ahead: The central bank cut its inflation forecasts for FY 2025 to 2.6% from 3.1% as strong monsoon rains have boosted harvests. Meanwhile, the RBI raised its FY 2025 GDP growth forecast by 0.1 percentage points to 6.8% thanks to a better-than-expected April–June print.

RBI becomes more dovish: The monetary policy committee also decided to leave its monetary policy stance as ‘neutral’, though two members voted to shift it to ‘accommodative’. Along with dovish remarks from the RBI’s governor—who suggested that the current macro backdrop has “opened up policy space” to support GDP growth—this means a slight majority of our panelists now expect a 25 basis point cut at the next meeting on 3–5 December. That said, the recent depreciation of the rupee to a record low might push the RBI to wait until early calendar year 2026 before trimming rates. Another key factor to watch is trade talks with the U.S., which will affect the outlook for GDP growth, inflation and the exchange rate.

Panelist insight: Analysts at Goldman Sachs said: “The Governor’s dovish tone and the lower inflation projections point to a dovish pause, in line with our view, paving the way for a further 25bp rate cut in December.” EIU economists are more hawkish: “We forecast that the RBI will maintain the policy rate at 5.5% over the rest of (calendar year) 2025. We believe that there is only a low probability (10-20%) of a rate cut in December. Instead, the central bank will resort to further monetary easing in 2026 if a trade deal with the US does not materialize.”

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