The Reserve Bank of India(RBI) unveiled its first monetary policy decision for the financial year 2025-26 on Wednesday. The announcement comes at a time of heightened global economic uncertainty, driven largely by rising trade tensions and a fresh round of tariff hikes imposed by the United States. RBI Governor Sanjay Malhotra addressed the growing concerns in his policy speech, indicating a challenging road ahead for both the global and domestic economies.

A Shaky Start to the New Fiscal Year

Governor Sanjay Malhotra acknowledged that the new fiscal year has commenced on a tense and uncertain note. “The global economic outlook is undergoing rapid changes. Recent trade-related measures, particularly the hike in tariffs by the United States, have intensified the uncertainties affecting economic prospects across different regions. These developments pose fresh headwinds to global growth and inflation,” he said.

He further pointed out significant shifts in global financial markets, noting that the US dollar has depreciated considerably, global bond yields have dropped, equity markets are witnessing corrections, and crude oil prices have plunged to their lowest level in more than three years. These shifts indicate the ripple effect of protectionist policies on the broader economic environment, with emerging markets like India particularly vulnerable to the fallout.

Monetary Easing to Support the Domestic Economy

In line with expectations and continuing its accommodative stance, the RBI announced another cut in the benchmark repo rate. This marks the second consecutive reduction by the Monetary Policy Committee (MPC) in recent months. The repo rate has been slashed by 25 basis points from 6.25% to 6.0%, following a similar rate cut in the February review.

This move is aimed at supporting a slowing economy that has been adversely affected by external trade disruptions and reciprocal tariffs from global trading partners. The reduction in the repo rate is expected to ease borrowing costs, providing relief to consumers and businesses alike, especially by reducing loan EMIs and encouraging spending and investment.

Growth Projections Revised Downward

In its policy announcement, the RBI also revised its GDP growth forecast for FY26 downward, citing global headwinds and prevailing domestic challenges. The revised growth projection for the fiscal year now stands at 6.5%, compared to an earlier estimate of 6.7%.

The quarter-wise breakdown of GDP growth estimates is as follows:

• Q1: 3.6%
• Q2: 3.9%
• Q3: 3.8%
• Q4: 4.4%

These figures suggest a sluggish first half of the fiscal year with a slight recovery expected toward the end. However, the central bank remains cautious, given the evolving global landscape and potential risks from further trade disputes or commodity price shocks.

Inflation Outlook and Food Price Trends

On the inflation front, the RBI retained its Consumer Price Index (CPI) inflation projection at 4% for the full fiscal year. The quarterly CPI forecast mirrors the GDP trend, with:

• Q1: 3.6%
• Q2: 3.9%
• Q3: 3.8%
• Q4: 4.4%

The RBI highlighted a notable decline in food inflation, which fell to a 21-month low of 3.8% in February. This was largely attributed to a strong seasonal correction in vegetable prices, offering temporary relief to consumers and helping to keep overall inflation in check.

Looking Ahead

The RBI’s latest policy decision reflects a cautious yet proactive approach in navigating a volatile global economic environment. While rate cuts and inflation control measures may offer short-term relief, the underlying challenges from international trade tensions, currency volatility, and weakening global demand continue to loom large. The central bank is expected to maintain a close watch on both domestic and global developments to steer the economy toward stability and sustainable growth in the coming quarters.