RBI lowers rates, signals support for growth amid global trade-driven slowdown.

In a significant policy shift, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC), chaired by Governor Sanjay Malhotra, cut the benchmark repo rate by 25 basis points (bps) to 6% and shifted its stance from ‘neutral’ to ‘accommodative’. This move comes against the backdrop of heightened global trade tensions, including sweeping U.S. tariffs, and rising uncertainty in global markets. While the decision aims to support domestic growth and improve monetary policy transmission, it also reflects the RBI’s cautious approach in managing inflation and external volatility. Indian equities reacted negatively, with the Sensex falling over 400 points post-announcement.

RBI Slashes Repo Rate by 25 bps to 6%

The RBI MPC announced a 25 bps cut in the repo rate, bringing it down to 6% from 6.25%. This marks the second consecutive rate cut after the central bank had lowered the rate to 6.25% in its previous meeting, the first reduction in nearly five years.
With this decision, the Standing Deposit Facility (SDF) rate stands revised to 5.75%, while the Marginal Standing Facility (MSF) rate and the bank rate have been adjusted to 6.25%.
More importantly, the MPC has shifted its policy stance to ‘accommodative’ from the earlier ‘neutral’, signaling the central bank’s willingness to consider further rate cuts in the near future, depending on incoming data and economic developments.

Inflation Projections Lowered, But Global Risks Loom

The MPC also revised downward its consumer price inflation (CPI) forecast for FY26 to 4% from 4.2%, citing easing core inflation and favorable base effects. The updated quarterly projections are:

• Q1FY26: 3.6% (down from 4.5%)
• Q2FY26: 3.9% (down from 4.0%)
• Q3FY26: 3.8% (unchanged)
• Q4FY26: 4.4% (up from 4.2%)

Governor Malhotra acknowledged that inflation risks have softened, but also warned of “known unknowns” such as the global tariff war, commodity price volatility, and currency movements. “Uncertainty in itself dampens growth by affecting investment and spending decisions of businesses and households,” he said.

GDP Growth Outlook Cut Amid Trade War Fears

Acknowledging weakening global cues and softer domestic demand, the RBI downgraded its GDP growth projection for FY26 to 6.5% from 6.7%. The revised quarterly breakdown is as follows:

• Q1FY26: 6.5% (down from 6.7%)
• Q2FY26: 6.7% (down from 7.0%)
• Q3FY26: 6.6% (up from 6.5%)
• Q4FY26: 6.3% (down from 6.5%)

The central bank cited weakening global growth, particularly due to aggressive U.S. tariffs, as a key reason for the downward revision. “Higher tariffs shall have a negative impact on net exports,” said Malhotra, while referencing India’s proposed Free Trade Agreement (FTA) with the U.S. as a potential cushion.

Stock Markets React Negatively

Indian stock markets reacted sharply to the RBI’s policy announcement, with the Sensex tumbling over 400 points and the Nifty 50 sliding below the 22,400 mark. Investors appeared spooked by the central bank’s decision to cut the repo rate and shift to an accommodative stance, interpreting it as a response to mounting economic headwinds and a potential slowdown in domestic demand. Banking and financial stocks bore the brunt of the selloff, as the rate cut raised concerns over shrinking net interest margins and weaker credit growth. Broader market sentiment turned risk-averse, with heightened volatility across key indices and sectors.

Policy Transmission and Liquidity Assurance

To aid monetary transmission, Governor Malhotra assured the markets that the RBI would “keep liquidity in surplus” and would provide sufficient funds to banks. “The trend on rates is going to be downwards,” he reiterated, suggesting the door is open for more rate cuts if macroeconomic conditions worsen.
Importantly, he emphasized that policy stance should not be linked directly with liquidity conditions, underlining the RBI’s intent to separate its growth-supportive rate policy from market operations.

Global Trade Tensions Cast a Long Shadow

The central bank’s policy decisions also reflect the growing impact of U.S. protectionism on emerging markets. The recent imposition of 104% tariffs on Chinese goods by the U.S. and threats of broader duties on other key sectors, including pharmaceuticals, have raised fears of a global recession.
Governor Malhotra addressed these headwinds, noting that “the impact of U.S. tariffs will be much less on India than on other countries,” yet acknowledged that “global volatility and huge uncertainty” are influencing the trajectory of yields, currencies, and capital flows worldwide.
Global benchmark bonds, including U.S. 10-year treasuries, have seen wild swings, with yields spiking by 25 bps overnight. Such global moves are putting pressure on India’s own bond and equity markets, complicating the RBI’s balancing act between growth and stability.

Final Word

The RBI’s 25 bps rate cut, along with a dovish policy stance and revised inflation and GDP forecasts, indicates a central bank that is keenly aware of growing domestic and international pressures. While the accommodative stance provides flexibility for future action, it also reflects a cautious but proactive strategy to deal with the ongoing fallout from global trade tensions.
As the dust settles on this policy announcement, the road ahead remains uncertain. Much will depend on how global trade dynamics evolve, particularly U.S. tariff actions, and how India’s domestic economy responds to monetary easing and fiscal stimulus in the months ahead.