In a carefully calibrated move designed to signal both patience and preparedness, India’s central bank left its benchmark interest rate unchanged on Wednesday, but kept the door wide open for future easing as the nation’s economy braces for the full impact of punishing US tariffs.
The decision was a “dovish pause,” a clear message that while the bank is holding its fire for now, it stands ready to act.
Governor Sanjay Malhotra announced that the six-member monetary policy committee had voted unanimously to keep the repurchase rate steady at 5.5 percent, a decision that was in line with the majority of economists’ forecasts.
A ‘prudent’ pause, a clear signal
In a televised speech, Governor Malhotra explained that it was “prudent” to hold rates steady for now, allowing the effect of recent policy measures, including tax cuts, to filter through the economy.
But he immediately followed this with a powerful and distinctly dovish signal, a clear nod to the gathering storm clouds of the trade war.
“The current macro-economic conditions and the outlook have opened up policy space for further supporting growth,” he said.
“The MPC, therefore, considered it prudent to wait for the impact of policy actions to play out and greater clarity to emerge before charting the next course of action.”
The market understood the message.
The rupee, which has been Asia’s worst-performing currency this year, rose on the news, while stocks traded higher.
A high-stakes balancing act
The central bank is currently walking a precarious tightrope, forced to balance a set of powerful and competing priorities.
On one side, it faces the twin threats of subdued inflation and the significant growth risks posed by President Donald Trump’s 50 percent export levies.
On the other, it must contend with the rupee’s precipitous slide, a decline exacerbated by a sell-off in local stocks by foreign investors spooked by the tariffs.
This complex picture was reflected in the bank’s updated forecasts. In a sign of confidence in the economy’s underlying momentum, the RBI raised its growth forecast for the current fiscal year to 6.8 percent.
At the same time, it lowered its inflation projection for the year to just 2.6 percent, well below its 4 percent target, citing benign food prices.
The door is open for more
This combination of rising growth risks and falling inflation has convinced the market that more rate cuts are not just possible, but probable.
“The MPC has delivered a dovish pause across rates and stance,” said Upasna Bharadwaj, an economist at Kotak Mahindra Bank Ltd.
“The growth risks from tariff uncertainties have created room for additional rate cuts if risks materialize.” She now sees scope for an additional 25 to 50 basis points of cuts for the rest of the fiscal year.
The central bank has already cut rates by a full 100 basis points this year in a bid to stimulate the economy.
Now, as the full force of the American tariffs begins to be felt, it has made it clear that it has not run out of ammunition.
The pause may be prudent, but the battle is far from over.
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