Sanjay Malhotra, the newly appointed Governor of the Reserve Bank of India, holds a press conference in Mumbai on December 11, 2024.
Indranil Mukherjee | AFP | Getty Images
India’s central bank on Friday kept its policy interest rate unchanged as trade deals with the European Union and the United States are set to support the world’s fastest-growing large economy.
Economists polled by Reuters had predicted that the policy interest rate would remain unchanged at 5.25%.
Reserve Bank of India Governor Sanjay Malhotra said of the overall economic outlook, “While there are encouraging signs with the successful completion of trade agreements, external headwinds have intensified,” explaining the reason for suspending the easing cycle.
He added that in the short term, domestic inflation and growth prospects remain positive.
“The guidance is balanced and suggests that there is likely to be an extended period of rest,” Radhika Rao, senior economist and executive director at DBS Bank Singapore, said in an emailed response.
The Reserve Bank of India cut its benchmark interest rate by 125 basis points last year, but economists say the focus will now shift to the ripple effects of the previous rate cut.
Malhotra said the central bank “remains proactive in liquidity management” to ensure sufficient liquidity in the banking system to “meet the productive requirements of the economy” and facilitate the transmission of monetary policy.
“We expect open market operations this quarter and the next,” DBS Bank’s Rao said.
Santanu Sengupta, India’s chief economist at Goldman Sachs, told CNBC’s “Inside India” that the central bank is likely to keep interest rates steady for at least a year. He added that if a U.S.-India trade deal is not reached, “there is an outside chance of a rate cut.”
Earlier this week, US President Donald Trump announced that the Indian government would reduce tariffs on Indian exports to 18%, allaying the central bank’s concerns about external headwinds to growth raised at its last policy meeting.
The United States has imposed 50% tariffs on India, the highest of any country and higher than rival China, which has soured relations between New Delhi and Washington.
Sengupta said the central bank will focus on interest rate transmission as long-term bond yields are “unlikely to fall” as bond supply increases while banks and insurance companies scale back purchases of long-term government bonds.
Finance Minister Nirmala Sitharaman said in her budget speech on Sunday that India will borrow 17.2 trillion rupees ($187 billion) in the fiscal year starting April 1. This number was an 18% increase from revised estimates for fiscal 2026 and exceeded market expectations.
At its December policy meeting, the RBI unanimously cut interest rates by 25 basis points to 5.25%, citing “weakness in some key economic indicators.”
According to the Economic Survey of India, released days before the US-India deal was announced, the country’s economic growth rate is expected to be 7.4% in the fiscal year ending March 2026, and between 6.8% and 7.2% the following year. This puts India on track to maintain its position as the world’s fastest growing large economy.
The RBI has little worry on the inflation front either. India’s consumer inflation rate rose to 1.33% in December, accelerating slightly from 0.71% in the previous month. The central bank forecasts inflation to be 2.1% this fiscal year, an upward revision from its previous forecast of 2.0%.
In the short term, the outlook for food supply “remains positive”, the RBI said in a release, adding that it expects even core inflation to remain range-bound, excluding fluctuations due to precious metal prices.
