MUMBAI: The 25% export duty shocker from the US effective August 7, which if not reversed to a reasonable level may shave off 20-30 bps from this year’s growth, has the Mint Road-watchers divided with some calling for a monetary support given the below-target inflation prints while some others calling for caution till the tariff talks are completed.
The Reserve Bank-led monetary policy committee begins its bimonthly meeting on Monday and the policy decisions will be announced on Wednesday. The RBI has already cut the policy repo rate by a 100 bps since February with the last meeting delivering an unconventional 50 bps to 5.5%.
On July 30, US president Donald Trump unexpectedly announced a 25% flat tariffs on Indian goods along with an unspecified additional penalty on India’s energy and military purchases from Russia. The announcement came as a shocker to New Delhi as five rounds of trade talks have been completed and the sixth round is slated for August 25 in the Capital. What was more shocking was that the new tariffs are much more than anticipated and leave Indian goods at a great disadvantage to many of its market rivals.
While economists at British brokerage Barclays see the tariff impact to shave 30 bps off GDP this fiscal—RBI has pegged it at 6.5% this fiscal, foreign agencies like the IMF and the Asian Development Bank have pegged it marginally lower at 6.4% and 6.5% respectively, domestic rating agency Icra and Japanese brokerage Nomura have pegged it at 20 bps bringing down growth to 6% this year.
According to Nomura economists Sonal Varma, Aurodeep Nandi, the higher tariffs have increased the likelihood of monetary policy easing.
“With inflation likely to remain below the 4% target (June printed in at a 77-month low of 2.1% and July is set for an nder-2% reading), despite any currency weakness, we continue to expect 25 bps cuts each in October and December to a terminal rate of 5%, with risks skewed towards further cuts. We believe the probability of a cut in August has risen to 35% (from 10%) pre-tariffs,” they said.
SBI chief economic advisor Soumyakanti Ghosh also sees another repo cut to the tune of 25 bps on Wednesday.
“We expect RBI to continue frontloading with a 25 bps cut in the August policy, saying we are living in a frontloaded world with tariff uncertainty frontloaded, better GDP growth frontloaded, and inflation numbers to continue to be frontloaded with even a sub-4% number with new CPI series. Even festive season is frontloaded. And no point in backloading/committing a type II error for now.
Elara Securities also in a noted said, with risks to growth elevated and inflation risks remaining benign, we expect growth-supportive stance of the RBI to stay. The July inflation will likely see a print closer to 2%, bringing it closer to lower tolerance band of the RBI. As risks to growth compound after the higher tariffs, the likelihood of a 25 bps repo cut in August has increased.”
However, Kaushik Das, the chief economist at Deutsche Bank India, does not see the RBI going for another rate cut or the need for one now having already front-loaded 100 bps.
“We think the 100 bps front-loaded rate cut is appropriate and that the repo rate should not be lowered more than the current rate of 5.50%, taking into consideration the need to maintain real interest rates of 100-150 bps on a forward-looking basis, as well as to have sufficient interest rate differential with the US to attract growth-critical capital inflows,” Das said.
According to him any additional burden to growth arising out of tariff tension should be dealt with by government, either through further negotiations or through fiscal policy response.
“The government has some fiscal space to provide temporary support to exporters, if the need arises. But even in this case, the fiscal policy response should be measured and targeted, so that the fiscal health does not deteriorate significantly, particularly after such a strong consolidation effort,” he said.
Similarly, domestic brokerage Care Ratings does not see a rate cut this time as the MPC has already frontloaded the easing cycle.
In a weekend note said the upcoming monetary policy meeting this week come against the backdrop of a notable moderation in headline inflation and a rise in external headwinds to growth.
“The RBI to revise its inflation forecast downward for the full year due to expected low inflation in H1. However, we expect headline inflation to breach the 4% mark by Q4FY26.
“Though the dramatically changed external headwinds warrants close monitoring and having already frontloaded the rate cuts and ensured ample liquidity, the MPC may prefer to pause for now and assess how the macroeconomic landscape evolves. Additionally, transmission of the previous rate cuts is still underway and could take some more time to show its effect on the economy,” its chief economist Rajni Sinha said.
“In fact we do not expect further rate cuts unless growth concerns aggravate. While the reciprocal tariff rate and proposed penalty are concerning, the RBI may opt to wait till we get further clarity on this front. With a forward-looking outlook, the RBI would be focusing on inflation in the quarters ahead,” she added.