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After a series of rate cuts this year, the Reserve Bank of India (RBI) maintained rates at 5.5% on Wednesday while evaluating the effects of US tariffs and tax cuts in India.
With all six members of the Monetary Policy Committee voting unanimously to keep rates steady, markets were anticipating the central bank to hold rates. With the RBI signaling a potential rate cut, possibly as early as December as inflation remains low, alongside strong economic data amid trade uncertainties.
Policy Rate and Economic Outlook
The RBI’s interest rate hold follows a 100-basis point cut in the first half of 2025, with a 50-basis point rate cut in June. RBI Governor Malhotra stated that the effect of past rate cuts is still unfolding, alongside recent fiscal policy changes. The MPC highlighted that inflation was revised to 2.6% for 2026, down from 3.1%, with subdued food prices providing support for monetary policy to support growth. ⁽¹⁾
Inflation in India remains low at around 2% for August, which is the RBI’s target range. Lower food prices and recent tax cuts are expected to pressure inflation. These tax cuts are aimed at boosting domestic demand, making consumer goods, automobiles and farm products cheaper.
The RBI has revised its GDP forecast upwards to 6.8% in Q1 2026, driven by strong growth of 7.8% in Q2. GDP growth is expected to grow at a slower pace than before at 6.4% in Q3 and 6.2% in Q4 due to global trade concerns, especially from the 50% tariff rate imposed by the US. ⁽²⁾
Impact of US Tariffs
US tariffs on India reached 50%, with an additional 25% tariff rate imposed in August on textile and marine products. As exports to the US sums up about 2% of India’s GDP, these tariffs could pose risks to industries sensitive to economic changes and could lead to job losses. The goods and services tax cuts are willing to support domestic consumption, which amounts to over 60% of India’s GDP, making the Indian economy rely less on exports compared to other nations. ⁽³⁾
However, the tax cuts may only provide a temporary boost to the Indian economy, and job creation would need to improve for an ongoing rebound in consumer consumption. ⁽⁴⁾
India’s export sector has been hit badly since the increase in tariffs to 50% on Indian exports to the US. President Donald Trump raised the import duty on Indian products as a penalty for buying oil from Russia.
RBI Governor Malhotra has also warned that higher US tariffs would slow down the Indian export market and are likely to moderate export growth.
Measures to Boost Indian Rupee Use and Loans
The RBI announced new plans to improve lending processes and promote global use of the Indian rupee. Banks are now flexible to lend to large companies, repealing restrictions that were made in 2016 and could provide loans for company acquisitions. ⁽⁵⁾
To boost the Indian rupee’s appeal, the RBI will allow foreign entities to create accounts in India and use the rupee to boost investments in corporate bonds and allow banks to lend funds in rupees to other nations. ⁽⁶⁾
The RBI outcome is also constructive for markets. Stable rates and soft inflation support bond yields, while a stronger outlook is positive for equities. The rupee could also benefit from higher stability, backed by robust forex reserves and resilient external fundamentals.
Indian Rupee Rises After RBI Holds Rates Steady
The Indian rupee nudged higher on Wednesday in a modest advance that was still enough to notch its best day in two weeks. The US dollar slipped broadly as the US government shut down and the Fed took on a more cautious stance.
Source: TradingView USD/INR Chart
The RBI has been intervening in the FX market to stabilize the rupee, where these interventions were made to reduce volatility and support investor sentiment for the rupee. ⁽⁷⁾
Bottom Line
As inflation remains low with strong economic growth, the RBI is willing to continue supporting the Indian economy by cutting rates and changes in lending. Despite risks from US tariffs, India’s strong domestic consumption and tax cuts continue to provide relief from tariff concerns.
