US President Donald Trump during a cabinet meeting at the White House in Washington, DC, US, on Monday, March 24, 2025. Trump reiterated his call for the Federal Reserve to cut interest rates during a Cabinet meeting on Monday, as he continues to push the central bank on monetary policy. Photographer: Samuel Corum/Sipa/Bloomberg
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Samuel Corum
The Indian economy is likely to record lower growth, while more rate cuts by the Monetary Policy Committee (MPC) may expected, post the US’s decision to impose reciprocal tariffs, economists have said. The Trump Administration announced reciprocal tariffs of 27 per cent on India.
“We see downside risk of 30-60 bps to our growth estimate of 6.5 per cent for F26e,” a Morgan Stanely report by Upasana Chachra, Chief India Economist and Bani Gambhir, Economist, said while adding that risks to growth are from the direct as well indirect channels. It also said that in the case of pronounced downside risks to growth, policymakers are likely to pause fiscal consolidation and increase capex spending to support domestic demand.
While the tariffs exceed estimates for India, on a relative basis, these are at par/lower than other key competing economies. With goods exports to the US at 2.1 per cent of GDP (total) and 1.7 per cent of GDP (excluding energy and pharma which are exempt from the tariff hikes), the direct impact will likely be less severe.
However, a slowdown in US growth and weak global trade momentum will impact external demand. More importantly, “we expect the impact to be more pronounced through the indirect channel of weaker corporate confidence, which will dent the risk appetite and further defer the capex cycle,” according to the report. Meanwhile, it feels the implementation of the trade deal, expected by the fall of 2025, could help reduce the downside risk from the direct impact of higher tariffs.
Most of the agencies have projected 6.5 per cent growth during FY26 for India, while the Economic Survey had estimated growth to be the range of 6.3-6.8 per cent. RBI expects economic expansion at 6.7 per cent. Now, all eyes are on the forthcoming 3-day meeting of the Monetary Policy Committee, which is scheduled to begin on April 7.
What will MPC do?
Most of research reports by economists see a deep cut in benchmark interest rates. A report by Barclays Research team says the higher-than-expected tariffs reinforce its view of three more rate cuts from the RBI, to a terminal rate of 5.5 per cent.
“India’s domestic orientation may offset some of the pressure from large reciprocal tariffs, while the possibility of a bilateral trade agreement suggests tariffs may eventually be reduced for the economy,” the report said.
However, as it said, ultimately weaker global growth and the downside effects of US tariffs on exports – even if temporary – suggest the RBI will likely remain on an easing track. “Growth and inflation outcomes being lower than the RBI’s estimated trajectory mean a rate cut at the meeting next week is likely a done deal,” according to the report.
Morgan Stanley expects the RBI to cut rates by 25 bps and also anticipates that on the back of an uncertain external demand environment, the RBI will change its stance to ‘accommodative’ in the policy review on April 9. Further, “on the back of downside risks to growth, we see risk of a deeper rate easing cycle, with additional rate cuts of 50-75ps (vs base case of 75 bps rate cut) as the RBI will likely need to support domestic demand,” it said.
Published on April 3, 2025
