Stock market, Trump tariff threat: Will RBI cut rates? Decision gets tricky

With the US President Donald Trump threatening India with further tariffs, following 25 per cent tax already announced, the decision on the policy rate for the six-member monetary policy committee (MPC) just got trickier. The policy review is underway in the backdrop of a not-so-favorable tariff rate with the US despite multiple rounds of negotiations. 

In the hindsight, said JM Financial, the larger than expected 50 basis points rate cut in June makes sense now. 

The stock broking firm asked: “If the RBI delivers a rate cut now, how would it respond if the tariff uncertainty intensifies going forward? The policy statement for June MPC had indicated that there is limited space for further policy easing. However RBI governor in his recent speeches has hinted that moderation in inflation below the central bank’s projection would open up space for further policy easing.”

The bond markets are building an end to the rate cut cycle, as is evident in the uptick in benchmark yields 10 bps to 6.37 per cent post the MPC meet in June. JM said the MPC may wade through the uncertainties with caution and maintain status quo on policy rates in August. 

Emkay Global begs to differ. It argued that the first leg of US fixing its current account deficit (CAD) would mostly emanate from the demand destruction rather than a shift in trade order – dragging the rest of the world as well. it feels the divergence in policy reaction function of emerging market Asia and the US Fed could be the new-normal and should not act as a deterrent to the RBI’s own reaction function.

“The consensus view of ‘no rate cut’ in August appears to emanate more from the June policy guidance rather than the present macro realities. We believe there are enough reasons for the RBI to deviate from its previous guidance, deliver a further 25 bps easing in August, and be more open-ended in its policy approach for further easing ahead. Notwithstanding the “done for now” RBI guidance in June, what the last MPC meeting taught us was that macro resets would evidently need front-loaded policy action than a back-loaded one,” Emkay said. 

Nomura India said the tariff news may increase the likelihood of monetary policy easing. The RBI has not formally revealed its baseline tariff assumptions, but it believes 25 per cent would likely be a negative surprise. 

“With inflation likely to remain below the 4 per cent target, despite any currency weakness, we continue to expect 25 bps cuts each in October and December to a terminal rate of 5 per cent by end-2025, with risks skewed towards further cuts. We believe the probability of a cut in August has risen to 35 per cent (from 10 per cent),” it said.

Emkay Global said despite facing a disproportionate tariff shock, Indian asset classes—including the Rupee—have remained relatively stable, minimizing financial market volatility and, by extension, limiting disruptions to the RBI’s policy response. 

“Most notably, India’s relative loss of export competitiveness vs EM Asia amid higher tariffs would, in principle, warrant some adjustment via a weaker currency vs peers. Such depreciation would act as a natural stabilizer for a weaker CAD, rather than being misread as a rate-easing deterrent,” Emkay said.