Trump’s tariff shadow loomed over monetary policy decision in August, minutes show

Mumbai: When the rate-setting committee of India’s central bank met two weeks ago, an uncertain global environment brought about by the tariff tantrums of US president Donald Trump loomed large. It forced the six-member panel to unanimously vote for a status quo on interest rates, despite a benign inflation, showed minutes.

“Considering all these, especially the current state of uncertainty on the external front, monetary policy needs to remain watchful,” said governor Sanjay Malhotra, according to the minutes of the meeting released by the Reserve Bank of India (RBI) on Wednesday.

Malhotra put forth four reasons behind his decision to vote for a pause in interest rates. First, the global economy, he said, continued to undergo a period of heightened uncertainty on the back of trade and tariff negotiations. Second, while economic growth, projected at 6.5% in FY26, is resilient, uncertainty in external demand remained a major drag on growth. Third, inflation continued to ease but was primarily on account of softening food prices. Lastly, the transmission of recent policy rate cuts is ongoing.

The monetary policy committee (MPC) lowered the repo rate by 100 basis points (bps) since February, with an outsized and surprising 50-basis point cut in June alone. A basis point equals a hundredth of a percentage point.

Trump’s tariffs on the world’s fifth-largest economy—one that he has often referred to as ‘tariff king’—are expected to hit sectors particularly exposed to exporting goods to the US. These include textiles, jewellery, apparel, seafood, machinery and mechanical appliances, chemicals, and auto components. Infact, economists estimate India’s growth rate to decline 20-30 basis points on the back of these tariffs. India faces one of the highest levies, at 50%, including 25% for buying Russian energy.

On 6 August, the MPC revised its FY26 consumer price inflation projection lower to 3.1%, from 3.7% earlier, while retaining its growth outlook at 6.5%. The panel has three members from RBI, while the remaining are external.

The MPC’s newest internal member and RBI deputy governor Poonam Gupta said that taking into account the growth-inflation outlook, past actions of the central bank, the state of the domestic economy, and the global dynamics, she does not see the scope or rationale for another cut.

Gupta said that the August policy action needs to be seen in the context of the past actions. She said that apart from a cumulative rate cut of 100 bps since February, RBI has also deployed other tools during this period. These include easier liquidity conditions, regulatory easing, transparent and frequent communication, and forward guidance.

“The effect of all these actions has been permeating through the economy. Transmission of the cumulative rate cut has been impressively rapid, but it is still unfolding, and is likely to pick up in the coming months, facilitated by the CRR (cash reserve ratio) cuts coming into effect from September 2025,” said Gupta.

Monetary policy committee member and executive director Rajiv Ranjan presented arguments for a pause as well as a cut in the repo rate of 25 bps. However, those in favour of a pause outweighed ones that made the case of another rate cut. Ranjan said that growth remains resilient, supported by public capex, resilient rural demand, and steady services activity.

“Inflation is significantly lower than projected earlier, but the decline is concentrated in a few volatile components and the outlook suggests a rise in inflation to above the target going forward,” he said.

According to Ranjan, in the next few months, more clarity will emerge on how tariffs and their impact on the macroeconomy evolves and therefore, it would be prudent to allow time for the recent policy easing to transmit fully into the economy and to assess its effects on real economic activity.

“An additional rate cut at the current juncture could also reduce our policy space should global or domestic risks materialise,” said Ranjan.

External members also highlighted the uncertainties in global conditions as a reason to hold back on further rate cuts.

Saugata Bhattacharya said that given the level of extant and evolving uncertainty, “it is difficult to provide even a modicum of forward guidance”. Policy decisions, said Bhattacharya, will continue to be based on incoming data and be taken on a meeting-by-meeting basis. He said that the rate-setting panel has been proactive in easing monetary policy since February 2025, which came in conjunction with multiple RBI measures to reinforce transmission and ease lending conditions.

“At this point, we need to step back, assess the impacts of the rate decisions and other policy actions,” he said.

He said that the outcome and timelines of a bilateral trade deal with the US are unclear and if these tariffs persist, there is likely to be an adverse impact on India growth in FY26, and probably beyond.