RBI Holds Interest Rates as US Tariff Relief Boosts Outlook

The Reserve Bank of India (RBI) has held its key policy rate steady at 5.25%, signaling growing confidence in the nation's economic trajectory after the United States scaled back trade tariffs.

The decision to maintain the rate at its lowest level was widely anticipated, aligning with the consensus from a Reuters poll of 70 economists. It follows a 25-basis-point cut from 5.5% at the central bank's previous meeting in December.

Tariff De-escalation Eases Pressure for Easing

A key factor behind the central bank's pause is the recent breakthrough in U.S.-India trade relations. The move comes just days after Washington announced it would reduce tariffs on Indian exports to 18%. This provides significant relief for India, which had been contending with cumulative tariffs of 50% on goods sent to the U.S., its largest trading partner, since August of last year.

Faced with those trade headwinds and a broader economic slowdown, the RBI had aggressively cut its key policy rate by 125 basis points over 2025 to stimulate growth. This easing cycle was supported by record-low inflation and government policy reforms, including changes to income tax brackets and lower consumption taxes.

Madhavi Arora, chief economist at Emkay Global, noted the improved environment. "The monetary policy committee faces a more supportive external backdrop, aided by the U.S.-India trade resolution, which should help stabilize the current account, FPI flows, and [the rupee]," she wrote in a note that correctly predicted the rate hold.

Economic Growth Forecasts Strengthen

The improved trade outlook reinforces positive domestic data. India's official statistics office projects the economy will grow 7.4% in the fiscal year ending in March, a notable increase from the 6.5% growth recorded in the previous fiscal year.

This forecast is backed by recent performance, with the economy expanding 8.2% in the quarter ending in September, accelerating from 7.8% growth in the prior quarter.

Inflation Remains Well Below Target

While the RBI is focused on growth, its mandate also requires maintaining price stability. On this front, the central bank has ample room to maneuver.

Although retail inflation rose from 0.71% to 1.33% in December, it remains significantly below the RBI's 4% target. In its last meeting, the central bank forecasted that inflation for the fiscal year through March would come in at 2%.

Rupee Rallies on Improved Trade News

The positive shift in the trade landscape has already had a tangible impact on currency markets. The Indian rupee, which had previously fallen to record lows amid foreign investor outflows, appreciated by more than 1% the day after the U.S. announced the tariff reduction. The RBI is also known to intervene in currency markets to manage volatility when necessary.