How RBI Responded To Global Trade War Challenge

Context: The Reserve Bank of India (RBI) has cut interest rates and adopted a growth-supportive stance amidst global economic turmoil.

What are the RBI’s Actions Against the Global Trade War

• Monetary Policy Adjustment: RBI’s Monetary Policy Committee cut the repo rate by 25 basis points.
  • Policy stance shifted from neutral to accommodative, suggesting room for more rate cuts.
• GDP Growth Revision: RBI reduced the FY26 GDP growth projection from 7% to 6.5%, anticipating trade war impacts.
• Inflation Forecast Adjustment: The CPI inflation forecast for FY26 was lowered from 2% to 4%, reflecting reduced food inflation.
• Forex Market Interventions: RBI is ready to intervene in the forex market to manage volatility.
  • It holds a robust $676 billion in forex reserves, covering about 11 months of imports.

India’s Economy Amidst Global Trade War

• Growth Impact: Trade tensions have already caused a 2–0.3% potential GDP loss.
• Export Dependence: India’s exports-to-GDP ratio is relatively low:
  • 21% for goods and services,
  • 12% for goods.
• This makes India less exposed to U.S. tariffs than countries like Vietnam (87%) and Thailand (65%).

• Indirect Economic Effects: Possible slowdown in global demand, capital flows, and private sector investment, especially post-COVID recovery.

India’s Inflation Outlook

• Current Inflation Trends:
  • CPI inflation dropped to 6% in Feb 2025, from 8.5% (Oct–Dec 2024 average).
  • Food inflation decreased to 8%.
  • Core inflation remained low, averaging 5% over the past year.
• Revised Forecasts: RBI revised FY26 CPI inflation forecast down to 4% from 4.2%.

Currency and External Sector Outlook

• US Dollar Volatility: Between Oct 2024 and mid-Jan 2025, the US dollar first rose 9%, then fell 6%, creating uncertainty.
• Currency Movements: The Chinese yuan fell by 6%, and the Indian rupee weakened by 4.4% from Oct 2024 to Feb 2025.
• RBI’s Forex Support: With $676 billion in reserves, RBI can stabilize the rupee, which is expected to hover around ₹88–₹89/USD by FY-end.

Positives for India’s Economy

• Favourable Monsoon: A normal monsoon is expected, which will likely boost agricultural productivity and rural demand.
  • A normal monsoon and stable global commodity prices could help control inflation.
• Tax Relief and Cooling Inflation: Lower income taxes and a sharp drop in food inflation (from 8.5% in late 2024 to 3.8% in Feb 2025) could boost consumption.
• Tariff Advantage in U.S. Market: US. tariffs on Indian goods are relatively low (26%), compared to:
  • China (145%)
  • Vietnam (46%)
  • Thailand (36%)
• This presents an opportunity for India to increase its U.S. export share.

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