India’s economy is expected to face a slowdown of 20-40 basis points this financial year due to the new US tariffs, which could also lead to additional interest rate cuts by the Reserve Bank of India (RBI), analysts predict.
On Wednesday, President Donald Trump imposed a 26% reciprocal tariff on India, challenging the RBI’s growth forecast of 6.7% for 2025-26 and the government’s economic survey prediction of 6.3% to 6.8%. Following the tariff announcement, Goldman Sachs revised its growth projection downward to 6.1%, while Citi forecast a 40 basis point reduction in growth, and QuantEco Research estimated a 30 basis point impact.
With inflation expected to average 4.2% this year—near the RBI’s target—the central bank reduced interest rates for the first time in five years in February. Analysts now expect an additional 25 basis point reduction during the RBI’s meeting from April 7-9, bringing the policy repo rate to 6.00%. However, the US tariffs have led analysts to reconsider the trajectory of interest rate cuts, with Goldman, Citi, and QuantEco now predicting a total of 75 basis points in cuts this year, bringing the rate down to 5.5%, the lowest since August 2022.
Citi’s Samiran Chakraborty noted that the RBI’s decision to cut rates would be a strategic move to minimize risks to growth, especially given the low upside risk to inflation. This monetary policy space allows the RBI to focus on stimulating growth while keeping inflation in check.
India’s GDP growth for the year ending March 31 is anticipated to have slowed to 6.5%, its lowest in four years, largely due to weak urban demand driven by high inflation, tight liquidity, and stricter RBI regulations on loans. Despite this, the central bank has eased liquidity conditions under the leadership of Governor Sanjay Malhotra since December, while pushing back plans to tighten banking regulations further.
Additionally, the government’s tax relief for individuals earning up to 1.2 million rupees, announced in February’s budget, is expected to boost domestic demand. According to government sources, there is no need for a broad economic stimulus at this point, though sector-specific measures may address particular areas of stress. Analysts like Vivek Kumar of QuantEco Research suggest that India might rely on interest rate cuts and a weaker currency to stimulate demand, given the global shifts in trade policies.
