Economists trim growth forecasts, RBI rate cuts back in focus

Following the latest round of global tariff actions, economists are reassessing India’s growth and monetary policy outlook for FY26. While India’s direct trade exposure to the US remains modest, experts point to potential second-round effects through weaker global demand, tighter financial conditions, and softer investment sentiment.


Nomura now projects India’s GDP growth at 6% for FY26, slightly below the RBI’s earlier forecast of 6.7%. “The impact is manageable, but the indirect effects of broad-based global tariffs could weigh on trade and investment,” said Sonal Varma, Managing Director and Chief Economist- India and Asia Ex-Japan at Nomura Financial Advisory & Securities.

Against this backdrop, the RBI’s Monetary Policy Committee, scheduled to meet from April 7 to 9, is expected to consider further rate cuts, with economists anticipating a 25-basis-point reduction in the upcoming policy and possibly more during the year.

With inflation expected to remain near or below 4%, analysts say there is room for policy support to continue, especially if global uncertainties persist

Soumya Kanti Ghosh, Group Chief Economic Advisor at SBI; Samiran Chakraborty, Chief Economist, India at Citi; Sajjid Chinoy, Chief India Economist at JPMorgan; and Pronab Sen, Economist & Former Chief Statistician, also shared their views on the impact of tariffs, GDP outlook, and interest rate trajectory.

These are the verbatim excerpts of the interview.

Q: How does the global economy look post this massive tariff imposition? Are you seriously cutting global GDP estimates?

Chinoy: We are doing more than that, because what we have seen this week is a seismic event and this needs to be viewed at three different levels. The first level is to understand that Asia has been particularly badly hit. If you look at where the US runs the 15 largest bilateral trade deficits, 10 of those 15 countries are in Asia, and therefore Asia, whether it was China, Vietnam, Japan, India, other countries were hit with very large tariffs. This is going to hurt Asia directly. That is the first level.

But there is a more important level here that affects the global economy. What this tariff increase does over the last few months is effectively increase US import tariffs by 20% points. US tariffs are now the highest in over 100 years. If these tariffs sustain and this constitutes the largest tax increase on US households since 1968 when the US Revenue Act came into being, so the sense is that a very large tax increase is inevitably going to throw the US economy, and with it, the global economy into recession later this year.

That is the big change from this week that we now have greater concerns that the US and global economy will spill over into recession later this year. Economies now have to worry about the both hits. First, your tariffs go up, and that hurts your exports. Second, global demand is going to be much weaker later here, because you are in a global recession. Third, and we don't have time for that today, there's a much larger structural question. Is this the beginning of the end of the 80 years of globalisation that we have seen since the Second World War, and what does that mean for growth, for inflation, for productivity around the world? But those are, those are more weighty questions that will unfold in the months to come.

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Q: We were already worrying about our own growth. This is an added headwind. Do you think there is space for extra dovishness, or even requirement for extra dovishness because of the global story?

Chakraborty:  The way MPC will probably look at it is that from a risk minimisation perspective. Now the downside risk to growth are much higher than the upside risk to inflation. That clearly opens up space for more easing. Our baseline is that you should see a 25-basis point of rate cut in this policy, along with a change in stance. The RBI has already provided significant amount of liquidity to the system and that assurance would also come in the April policy. Additionally, we have added a rate cut in the August policy, also in response to these downside risk to growth. So that way, we now have another 75-basis point of more rate cut in this cycle.

But we have also very clearly mentioned that this is we are entering a period where it is possible to imagine that the policy rates could be below the neutral rate also because this 75 basis point rate cuts will only take us close to a neutral rate of about 5.5%. So given our estimate that inflation is running close to 4%, but there is a possibility that we might want to go below neutral also. But the world is in a state of flux, so I don't think policy makers will be very proactive always in this. Maybe to some extent, they will wait for how these things unfold before taking that final call on whether to go below the neutral or not.

Q: Let me first get the GDP numbers. That is also a forecast we will look for. Sonal that question to you, will India's GDP growth number come under pressure? The Reserve Bank's current forecast, or February forecast for FY26 was 6.7% will they have to lower it?

Varma: Yes, we do think that downside is the RBI’s projection of 6.7%. Now the direct impact on India because of US exposure is not that high. The India's exports to US are about 2.1% of India's GDP. The impact is manageable, but the indirect and sort of the second-round effects are what could be more material, because it's broadly a universal tariff that has been imposed. So global trade numbers are likely to get downgraded. Uncertainty is weighing on business investments, and tighter financial conditions will also feed back into weakness in private investments going forward.

We do think that the growth numbers starting April which will reflect the real underlying export growth as compared to the last three to four months, where there was front loading the head of anticipated tariffs are likely to be materially weaker. Our own growth projections for India are at 6% for FY26 and we do think the 6.7% of the RBI is on the higher side.

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Q: 6% - that is not a number, I heard from many people. I heard 6.1 to 6.3% but then the MPC has to concentrate on inflation. Soumya that to you, will India's inflation pan out as 4.2% or can it be even lower?

Ghosh: Now amid this global turmoil, uncertainty, I believe the good news is on the inflation front. The numbers for inflation are looking significantly better now, and if the current estimates hold for most of the months in the current fiscal, till October or so, the numbers will stay closer to 4% or even lower than 4% on many of the occasions. For the last fiscal, the RBI projections were higher, and this time also the RBI target of 4.2% inflation is likely to be undershoot. From that point of view, inflation as of now doesn't look a big issue.

There are two more factors, which are downside risks to growth, which could also act as comforting factor on inflation. One is the point that because of the global uncertainty on tariffs, there could be a price decline in some of the sectors. So that could also have a sobering impact on the inflation. Given the numbers, and given the fact that the growth continues to be a little bit weak, so that will also give a comforting factor in terms of manageable core inflation. If I take all these factors into account, the inflation numbers are going to surprise on the downside, at least for now, for next several months in this fiscal.

Q: But Dr Sen, let me turn the question on its head. Samiran, is going to the extent of even we have to go below the neutral rate. What about savings? We are at kind of a five year or what some people say, even 40 year low in terms of household savings. Can we go no holds barred on cutting and dovishness?

Sen: In a sense, we can, and we will probably need to do that. So here I agree with we may need to go below. This is not the time to do it. I mean, one has to think this through a little bit. You will have to see what strategies different countries around the world are going to adopt, because there is going to be a wholesale change among almost all countries of the world in terms of the way they are going to plan their reaction to what has what has transpired. So, yes, we should be prepared for lowering everything.

I agree that inflation is likely to come down sharply and this is not just about what is happening globally. It's also that if you look around the world, the only country that stands out as being able to grow on its own scheme is India. When somebody mentioned that the growth would be probably sub 6% that is not a bad number, by the way. Because other countries are looking at facing recessions, and we would be around the 6% mark, purely on the basis of our own strengths. The point is, we shouldn't rush into anything until we see how things are evolving in the rest of the world.

Q: Soumya has pointed out that we will probably undershoot the 4.2% that the Reserve Bank has forecast. How much more can we even go below 4% given the global disinflation and recession that we fear?

Chinoy: A lot will depend on how food prices evolve, but for the time being, India is benefiting from a perfect storm. We had February CPI at 3.6% we think March is going to be close to that so you will get a full quarter, January-February-March, but inflation will average about 3.8% of thereabouts. It is important to separate the different channels, we have always been maintaining that core inflation dynamics have been soft for the last year because the economy still is living with some slack. Yes, core prices moved up last month, but that was just a facet of gold and silver and ornaments, and that may happen again.

Gold prices may well be a safe haven, so one will have to look through those commodity price changes. But generally, the sense is core is benign, and the fact that China has got a lot of overcapacity, and the fact that now transhipment through the rest of the region through the US will not work out, because other economies like Malaysia or Vietnam have been hit with very high tariffs, means China has got all this over capacity, which is increasingly going to find its way into other Asian economies, and that is going to be disinflationary.

The concern really is not on core - a; b - this is a global demand shock. We are now seeing crude prices below $70 per barrel and so if global demand slows and you are into some kind of recessionary territory that should be disinflationary for commodities and c - in the near term, we are benefiting from very strong kharif and rabi crop. In a way, this is the perfect storm. We expect to see inflation very close to 4%. For me, the only concern is, we have had a series of food price shocks in the last three-four years, we can't rule that out in the coming months, but the key point is, if there is slack in the economy, the RBI will be less concerned that a food price shock translates into wages, and therefore can look through any temporary supply stock.

The bottom line is, unlike last year, directionally, it is very clear where the RBI has to go, because inflation is settling towards 4% and downside risk to growth have increased.

Q: Samiran what are you expecting on liquidity? The governor already flooded the system with over ₹7 lakh crore from January 15 onwards. Can there be an explicit CRR cut for instance, even more on liquidity?

Chakraborty: Yes, that is quite right, just cutting rates and going towards the neutral or below neutral is not going to be enough from the perspective of transmission of these rates to higher growth. There are kind of two different channels through which this plays out. The first channel, obviously, is that now we have 60% plus of loans in external benchmark lending rate (EBLR), so there will be an immediate relief on that front, which we expect that about 50-75, basis point of rate cuts is worth about 30 basis point of GDP positive impact.

However, the bigger transmission channel is through higher credit growth and for that to happen, the rate cuts will have to be translated to lower deposit rates and lower lending rates and generate that demand for credit. In normal circumstances, we know that monetary policy works with long lags, but this is probably one of those times where the policy makers might want to get some immediate benefits as well, because this is not a normal cycle.

In that sense, there could be that additional impetus to provide liquidity and make this transmission faster. However, a large part of the OMOs we think is more substitutes for the VRRs that are going to mature very soon. We don't think that a CRR cut is immediately on the cards. We have to understand that next month we are going to see a pretty large, substantial, may be ₹2-3 lakh crore of RBI dividend also coming as durable liquid into the system. So maybe this is not the right time for the CRR cut, but now we have to think holistically on CRR, LCR everything to take a call on how much reserves the banks should be holding. But that's more of a structural question.

Q: Sonal, there is another way the RBI can show dovishness stance. Do you expect that the RBI can signal significant dovishness in April itself and change its stance from neutral to accommodative?

Varma: Our view is they can hold on to the neutral stance for now, there are two aspects. One is the walk versus the RBI’s talk. Now we know that policy transmission in India requires liquidity to be ample, and that is exactly what we have seen from the RBI in the last two months, with system liquidity moving to a more sustained surplus going forward, in our view. So that is helping with policy transmission, and you could argue is a signal of an accommodative stance.

But whether formally the stance needs to change to accommodative or not, is more a strategic question, in my view. Typically, in India's case, the qualitative guidance on stance can do the job of easing financial conditions, once rate cuts and liquidity easing have done their job. We can probably wait to change the stance, but for all fact, the rate cuts plus the liquidity easing have already done that signalling.

Q: The RBI already postponed the new LCR rules, the new project financing, provisioning, they indicated a lot of dovishness with these actions in February itself. What is your sense, overall stance, liquidity rate, how can they show their damages, and how much of it will they show?

Ghosh: In terms of the liquidity, RBI has been doing a commendable job, because the liquidity, which was in significant surplus, had turned positive as of March 31 and over more than 1 trillion was in surplus so that is a positive move, because turning from a system of continuous deficit to surplus has been because of the significant liquidity injections over a point of time. We must appreciate that this policy of providing adequate liquidity as a buffer for better transmission the Reserve Bank could promise the markets or ensure that this liquidity continues to be remain in a surplus regime. They are significant liquidity injection coming in May so the transmission has to be more effective.

You must appreciate that last time when these rate hikes happened, in the rate hike cycle, out of the 250 basis point rate hike, the deposit transmission was higher than 250 basis points, but the lending rate transmission was lower. The Reserve Bank actually would like to ensure that the deposit transmission also is in line with the repo rate cuts because then that will give a better signal to the market in terms of an overall rate situation which is comfortable for the entire financial markets.

I believe that the strategy of adequate stance, the strategy of repo rate cut will continue to move together to ensure that the transmission perhaps is faster this time, because we are already in an EBLR regime. If it happens immediately, possibly the liquidity will ensure that the lag which the monetary policy works, that also works faster, so that the transmission happens quickly and effectively.

Q: Dr Sen, what should the Reserve Bank convey? The MPC is meeting under difficult circumstances, what should the overall tone be?

Sen: I can only say what I would do there. The tone should be of calm. We should not give the impression that we have started to flap at what's going on. The tone should be measured. It should be calm. It should not give rise to expectations of excesses in either direction, and that is the most important thing at this time. Because the problem at the moment is really a problem of uncertainty. What you need is a stable hand on the tiller.

Q: It is time to vote. What will the MPC do to the repo rate on April 9?

Chinoy: Cut by 25 basis points.

Chakraborty: I guess 25 basis point cut.

Soumya: 25 basis point cut.

Q: Sonal: CRR, repo cut?

Varma: Only repo cut.

Q: Dr Sen, your committee is unified with 25 basis cut, your stance?

Sen: At the moment, I wouldn't do any cut.

Q: Let us come to the stance. What will RBI do to the stance?

Chinoy: Change to accommodative, it helps in transmission.

Soumya: It will be neutral.

Varma: Retain neutral.

Chakraborty: A change to accommodative.

Sen: Neutral.

Q: How many rate cuts in 2025 including the April cut. Is it 50 basis, 75 basis, 100 basis from April onwards.

Chinoy: 75 basis points with the risk of more depending on the global economy.

Soumya: Three cuts, maybe higher.

Chakraborty:  75 basis point, possibility of more.

Varma:  We are expecting 75 basis point in total.

Sen: 75 or more. But I would do it over less tranches, instead of doing just 25 basis points at each go.  Because the first time you do a cut, you need to send a message. I would say - do 50 basis points at one shot, and then go to 25 basis point cut later. I don’t expect a cut in April.