RBI's likely 25 bps rate cut seen as non-event amid tariff war concerns

Reports suggest that India's overnight indexed swap (OIS) rates signal a bigger reduction or a change in its stance.

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) is widely expected to announce a 25 basis points (bps) rate cut on Wednesday that will bring down the repo rate to 6 per cent. But the move is unlikely to stir markets, analysts believe, with investor attention firmly fixed on the broader impact of the escalating US-led trade war.

 

The RBI’s expected rate cut may not significantly impact the markets, as broader global concerns—particularly the fallout from escalating trade tensions led by the United States—continue to dominate investor sentiment, according to Deven Choksey, managing director of DRChoksey FinServ.

 

 

As for the market reaction, Choksey said that under normal conditions, a rate cut would have been a positive trigger. “But now, the market is more concerned about the ripple effects of US tariffs. Corporates are being cautious, ensuring their businesses aren’t adversely impacted.”

 

Besides the rate cut, the central bank is expected to adopt a more accommodative policy approach. However, reports also suggest that India's overnight indexed swap (OIS) rates signal a bigger reduction or a change in its stance. 

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Trade war impact

 

The policy meeting also comes at a crucial time when the US has unleashed a barrage of tariffs on all trading partners, igniting a trade war with potential supply chain disruptions. China, the European Union and other countries have retaliated against these measures, triggering a global stock market rout.

 

On Monday, the indices BSE Sensex and the Nifty50 plunged 5.23 per cent and 5.07 per cent, respectively, registering its worst fall since June 4 last year. The broader markets fell as much as 9 per cent during that session.

 

A 25 bps rate cut by the RBI is unlikely to significantly move markets, given the heightened concerns over the global tariff war, said G Chokkalingam, founder and head of research at Equinomics Research. “Markets may not react to a 25 bps cut, but a 50 bps cut could trigger a positive response,” he noted, citing sluggish credit growth, muted corporate earnings, and ongoing trade tensions as bigger concerns for investors. 

 

Chokkalingam argued that the ongoing tariff war is deflationary and structurally damaging to global growth, which in turn justifies a rate cut. He pointed to supportive factors such as low inflation, a predicted normal monsoon, and record crop output as additional reasons for the RBI to ease rates. “India’s interest rates remain among the highest in recent times. A rate cut is both justified and expected, but global uncertainties will overshadow its impact,” he added.

 

On the quantum of the rate cut, Choksey said a 25 basis point (bps) reduction was widely anticipated. “A 25 bps cut is a given. But if the RBI shows boldness and cuts by 50 bps, it would help the economy undertake pre-monsoon-related activities more effectively,” he said. “There’s already ample liquidity in the system, and the real focus should now be on ensuring rate cuts are passed on to end customers.”

 

Market strategy

 

Choksey believes that the RBI's rate cut cycle, once initiated, typically spans up to eight quarters. "Normally, rate cuts happen over six quarters, followed by a two-quarter cooling-off period, except when inflation proves stubborn," he said. "Given the current scenario, inflationary pressures are unlikely to resurface."

 

Inflation in India, he suggested, has largely been 'imported' so far, but that dynamic is shifting. “Imported inflation is now taking a backseat. We are seeing a trend of deglobalization, and the global dollar trade is gradually transitioning into a de-dollarized model,” Choksey said. 

 

 

He also highlighted that India, being an inward-looking economy, stands to benefit from this shift. “Lower crude oil prices, reduced dependence on the US dollar, and softer commodity prices are all favorable for India. These factors are likely to keep inflation subdued, paving the way for lower interest rates,” he said.

 

Despite the global uncertainty, Choksey sees the current environment as an opportunity. “This is a good market to buy into. Investors should consider accumulating rather than waiting on the sidelines,” he advised.