Amid RBI rate cut cheers, did you miss RBI's alert that could threaten India’s economy?

For the first time in nearly five years, the Reserve Bank of India (RBI) has cut interest rates. In a move aimed at supporting economic growth, the six-member Monetary Policy Committee (MPC), led by newly appointed Governor Sanjay Malhotra, lowered the repo rate by 25 basis points to 6.25%. But alongside the cautious optimism, Governor Sanjay Malhotra delivered a stark warning: India is not immune to the global storms brewing on the horizon.

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The decision comes against a backdrop of moderating inflation and slower-than-expected economic growth. While inflation has eased, helped by stable food prices and the impact of past monetary policy actions, growth remains fragile. The RBI expects economic activity to pick up in the coming quarters, but GDP expansion is still significantly lower than last year’s pace.

A strong rabi harvest and a revival in industrial activity are expected to provide much-needed support to growth. On the demand side, household consumption is likely to stay resilient, helped by tax relief measures in the Union Budget.

Business confidence is holding up, with higher capacity utilisation, stronger corporate balance sheets, and steady credit flows pointing towards a rebound in fixed investment. The government’s continued focus on capital expenditure is another key pillar of support, reflected in positive signals from enterprise surveys and purchasing managers’ indices (PMIs).

India’s booming services exports are expected to remain a crucial growth driver. However, the global backdrop remains uncertain. Geopolitical tensions, rising trade protectionism, fluctuating commodity prices, and financial market volatility pose real risks to the outlook. While the domestic economy is showing resilience, external shocks could still disrupt the recovery path.

Also Read: Malhotra & Co peg India’s FY26 growth aim at 6.7%

This delicate balance between taming inflation and boosting growth has given the MPC room to act. But the governor’s message was clear—while rate cuts can help, India is not insulated from the rising global risks that could disrupt its financial stability. As world markets grow increasingly volatile, the Indian economy must brace for potential shocks.

"A higher worry for us is the global uncertainties and how that pans out," Malhotra said in post-policy press conference.

Slowing world economy and rising financial risks

The global economy is struggling to maintain momentum. Growth remains below historical averages, and while trade is still expanding, progress on bringing down inflation has stalled.

For emerging markets like India, the situation is even more complex.

As expectations of aggressive rate cuts in the US fade, the US dollar has gained strength, pushing bond yields higher, Malhotra noted. This shift has triggered large capital outflows from Emerging Market Economies (EMEs), causing their currencies to depreciate sharply and financial conditions to tighten. At the same time, monetary policies in advanced economies are moving in different directions, adding to market turbulence. Geopolitical tensions, trade disputes, and policy uncertainties have further intensified volatility, leaving EMEs facing tough choices as they navigate an increasingly unpredictable global landscape.

The Indian rupee has already felt the heat. Over the past few months, the currency has faced depreciation pressures as global investors pulled money from riskier markets. The RBI has been actively managing this volatility, but with external pressures mounting, the battle to stabilise the rupee is far from over.

"The RBI will remain watchful of the global uncertainties and their impact on the Indian economy. A global trade war could adversely affect India’s growth, inflation, and trade dynamics. However, there is still a lack of clarity on the extent of this impact," Rajani Sinha, Chief Economist at CareEdge, said.

The Trump trade turmoil

Adding another layer of uncertainty is the return of Donald Trump to the White House. The US President has wasted no time in reviving his aggressive trade policies, threatening allies and rivals alike with tariffs.

One of his latest warnings is aimed squarely at BRICS nations, including India. Trump has threatened to impose 100% tariffs if BRICS countries attempt to weaken the dominance of the US dollar by promoting an alternative global currency.

"Even if the tariff trade wars were not to carry out, but just the uncertainty in itself is something, you know, which is worrisome and that has direct impact on growth, that has direct impact on investment decisions and that has direct impact on consumption expenditure decisions, which gets deferred," Malhotra said.

Malhotra said while rupee depreciation is also linked to the uncertainties, it's not good for growth and it's not good for imported inflation.

India has so far avoided direct tariff hikes in the latest wave of US protectionist measures. With nearly 18% of India’s total exports heading to the US, any disruption in trade ties could hit Indian businesses hard.

"With the Trump Administration in the US shaking up global markets, expect the RBI to be proactive in using liquidity and forex management tools...The tariff war set off will have a bearing on policy rate cuts worldwide," Dharmakirti Joshi, Chief Economist, Crisil, said.

In 2023-24 alone, India exported goods worth $77.5 billion to the US, more than the next three largest export markets combined. A sudden shift in US trade policy could have ripple effects across industries, from IT and pharmaceuticals to textiles and engineering goods.

At the same time, there are opportunities for India. The growing strategic partnership with the US in sectors like defence, energy, and technology could open new doors. But the uncertainty of a Trump-driven trade war remains a looming threat.

Geopolitical tensions and market volatility

Beyond trade wars, the global geopolitical landscape remains unstable. Conflicts in Eastern Europe, the Middle East, and tensions in the South China Sea are keeping financial markets on edge.

Meanwhile, major central banks are pursuing diverging monetary policies. While the European Central Bank is considering rate cuts, the US Federal Reserve has signalled caution, leading to wild swings in global financial markets. This unpredictability makes it harder for emerging economies like India to plan ahead, as they remain vulnerable to sudden shifts in investor sentiment.

For India, this means staying vigilant. The RBI has reaffirmed its commitment to financial stability, but with so many external forces at play, managing risks will require constant intervention.

A strong dollar and rising US bond yields make things more difficult for India. They increase the cost of imports, put pressure on inflation, and make it more expensive for Indian businesses to borrow from international markets.

The RBI has assured that it is using all available tools to manage these challenges, but the road ahead is uncertain. A stronger US dollar, volatile oil prices, and the possibility of tighter global financial conditions could further complicate India’s economic outlook.

RBI striking the right balance

Governor Malhotra said every policy decision comes with trade-offs. While financial stability and consumer protection remain priorities, the push for efficiency must continue.

The RBI will have to walk a tightrope - cutting rates to support growth while ensuring financial stability in a turbulent global environment.

For now, India remains one of the most resilient economies in the world. But as global risks mount, policymakers and businesses alike must prepare for uncertainty.

The next few months will be crucial in determining whether India can weather the storm or get caught in the crosswinds of global turmoil.