The Reserve Bank of India (RBI) kept the repo rate unchanged at 5.5% during its August 2025 Monetary Policy Committee (MPC) meeting, citing the need to let earlier rate cuts—totalling 100 basis points this year—filter through the economy. While retail inflation is currently at a six-year low, the central bank warned that the US’s recent steep tariffs on Indian exports and ongoing global supply issues could quickly change the outlook.
The US has doubled duties to 50% on several Indian goods, targeting about $132 billion in bilateral trade. This move, linked to India’s continued imports of Russian oil and defence equipment, could strain exports, disrupt supply chains, and raise costs for industries dependent on imported components. RBI Governor Sanjay Malhotra noted there is no immediate impact on GDP or inflation, but cautioned that a prolonged standoff may feed into core inflation, already at 4.4% in June due to higher education, healthcare, and gold prices.
The RBI highlighted that headline CPI inflation—2.1% in June—was mainly the result of temporary factors like falling vegetable prices and favourable base effects. These gains could reverse with seasonal trends, especially in perishable food categories. External shocks such as geopolitical tensions, commodity price swings, and global trade disruptions remain key risks that could spill over into domestic markets.
According to 1 Finance Research, the repo rate is likely to stay at 5.5% until at least October 2025, with a possible 25-basis-point cut in early 2026 if inflation remains in the 2–6% band and tariff pressures ease. However, if US tariffs remain high or expand and supply chain disruptions persist, inflation could approach 5–6%, prompting the RBI to hold rates longer. A global slowdown that significantly hits India’s exports could open the door for further cuts—up to 50 basis points—but only if inflation stays low.
For now, the RBI is expected to maintain a wait-and-watch stance, prioritising the transmission of earlier cuts to borrowers. Progress has been slow, with small businesses and home loan rates barely easing due to liquidity shortages in non-banking financial companies (NBFCs) and sector-specific credit frictions. The latest US tariff escalation adds another layer of uncertainty, complicating the RBI’s balancing act between supporting growth and keeping inflation under control.
