Six members of the monetary policy committee (MPC), led by RBI Governor Sanjay Malhotra, will worry about the fog of trade war as they meet to take a final call this Wednesday on whether to cut interest rate or take a pause amid global uncertainties.

President Donald Trump has cleared the fog a little when he announced, a few days ahead of the MPC meet, that the US would impose 25% tariffs on goods imported from India and an unspecified penalty for buying Russian oil and weapons. But what the ultimate deal will be after rounds of negotiations and how it will impact India’s economy in a reshaped world trade structure is anybody’s guess at this juncture.

The Reserve Bank of India (RBI) will at least have a very rough base to work on now as it starts reviewing its earlier forecast on GDP growth and inflation for the current financial year. It is likely that the central bank will hold on to its estimate of 6.5% GDP growth for FY26 while bringing the inflation projection further down from 3.7%. Any revised estimates on GDP would probably have to wait for more inputs as Trump’s tariffs war evolves across the world.

The Indian government is still trying to navigate through this fog. How much should India depend on the US? Can it work on multilateral trade arrangements through a balancing system? Will Russian oil and weapons be in or out? How deep can it go with Europe? How much can it bond with China on trade terms? Will it be able to become a supply chain powerhouse or is that space over in a tariffs-driven world where each developed nation turns inwards?

For all central banks, there are new challenges to face as the world around them is changing fast. America, the creator of the post-World War II institutional structures, is destroying many of them as under Trump it feels other nations are making more money at their cost. The movement away from free trade and the weaponisation of tariffs, as Trump believes, is to bring back the manufacturing jobs and make America rich again.

In the wake of this turmoil, Malhotra and his team may be tempted to reduce the interest rate for the fourth consecutive time. Even if that were to happen, the size of the repo rate cut can’t be more than 25 basis points (bps) as it will come immediately after the MPC settled for a higher-than-anticipated 50-bps reduction in the previous bi-monthly monetary policy in June.   

For those who are in for a rate cut in the August policy, the argument is that inflation is low and growth needs a push. Inflation, in fact, has cooled to a more than six-year low of 2.1% in June, prompting the RBI Governor to say that there is an expectation that it could undershoot its 3.7% forecast for FY26. 

The July inflation, for which data is awaited, could fall even further. Aditi Nayar, chief economist at ICRA, expects retail inflation in July to moderate to a series-low of around 1.4%, which should be the bottom before the readings normalise.

Nayar estimates the FY26 inflation to average at 3.2%, with risks tilted slightly to the downside. Barclays has already brought down its inflation estimate for FY26 to 3.5% and said that this may give the RBI the room to support growth. 

If everything is so cool about inflation and growth runs the risk of getting hurt amid trade uncertainties and consumption slowdown, why not cut repo rate now? 

More so when some economists have lowered their GDP growth forecast for FY26 by 20-40 bps, after Trump announced the tariffs on Indian goods. In fact, the base tariff at this stage is higher than that for other Asian countries such as Vietnam, Bangladesh and Indonesia.

Says Nayar, "The tariffs imposed by the US will pose a downside risk to GDP growth, while admittedly injecting volatility into the Indian rupee. In our view, the balance remains slightly tilted towards a final rate cut of 25 bps in the August 2025 policy review."

A falling inflation and a potential negative impact on GDP growth furthers the case for a rate cut in August. A lower lending rate offers the hope that consumer demand can be triggered, the appetite for loans revived and private capital investments hastened.

Soumya Kanti Ghosh, group chief economic advisor at State Bank of India, is in for a 25-bps rate cut as it would help boost credit demand ahead of the festive season. 

There is, however, a counter argument which presses for a rate-cut pause in August. Some economists believe the recent slide in the rupee may reduce the chances of a rate cut in August. The MPC may prefer to wait until the October policy to decide on easing rates as the June quarter GDP data would have come out by then. There would also be more clarity on food inflation outlook as the monsoon season would have ended.

Another comforting factor would be the strong possibility of the US Federal Reserve going for a rate cut in September amid data showing a cooling job market. 

The demand for credit has not revived since the RBI kick-started the interest rate-cut cycle in February this year and brought down the repo rate by 100 bps to 5.5%. The thinking among some economists is to have another rate cut when the market is more ready to make use of it.

The MPC’s decision on rate cut or not is just a couple of days away and has drawn wider interest as it comes just after Trump’s tariffs announcement on India.