Trade uncertainty clouds the economy as the Reserve Bank of India unexpectedly cuts interest rates by 50 basis points

Faced with the trade uncertainties triggered by Trump's tariff policies and the pressure of slowing domestic economic growth, the Reserve Bank of India (RBI) unexpectedly announced a significant interest rate cut of 50 basis points, far exceeding market expectations. On Friday, June 6, the RBI's Monetary Policy Committee decided to lower the benchmark repurchase rate by 50 basis points to 5.5%. This marks the third consecutive rate cut by the bank since February 2025, with a total reduction of 100 basis points this year. Meanwhile, the RBI also reduced the cash reserve ratio by 100 basis points to 3%, with an expectation of 4%. According to Bloomberg, among the 34 economists surveyed, only one predicted such an aggressive rate cut. RBI Governor Sanjay Malhotra stated in a televised address in Mumbai that inflation has "significantly eased" to well below the target level, and the recent economic outlook gives the central bank confidence that inflation will sustainably align with the target. Data shows that India's retail inflation rate has dropped to 3.16% in April, the lowest in nearly six years, far below the central bank's mid-term target of 4%. After the rate cut and reserve requirement reduction, Indian bonds rose, while stock market gains narrowed. The yield on India's 10-year government bonds fell by 6 basis points to 6.19%. The yield on India's 5-year government bonds dropped by 14 basis points, currently at 5.68%. Economic Growth Under Pressure: Trade Clouds Loom India's economy grew at a slower pace of 6.5% for the fiscal year ending in March, putting pressure on policymakers to stimulate growth. Although data shows that India's GDP growth for the January-March quarter still reached 7.4%, the escalation of trade tensions triggered by the Trump administration's tariff policies and global growth concerns suggest that the RBI may need to further ease its policies. The easing of consumer price growth also allows the RBI to shift its focus towards boosting domestic demand, making this policy adjustment particularly important in the context of increasing global trade uncertainties. As the 90-day "tariff grace period" set by the U.S. is set to expire in July, India is accelerating trade negotiations with the U.S.. Earlier media reports indicated that India is discussing a three-phase trade agreement with the U.S., aiming to reach a temporary agreement by early July. This temporary agreement may cover market access for industrial goods, certain agricultural products, and address non-tariff barriers such as quality control requirements. It is noteworthy that the RBI simultaneously adjusted its monetary policy stance from "accommodative" to "neutral." Malhotra stated that further actions will depend on upcoming data. This subtle change suggests that while the RBI is actively stimulating the economy, it is also leaving room for future policy flexibility