Reserve Bank of India Governor Sanjay Malhotra will have to weigh in the Donald Trump factor as he starts review in less than two months of the interest rate cut cycle which he kick-started on 7 February.

A tiny repo rate cut of 25 basis points and an easing of inflation to 4.31% in January has ensured that growth will continue to be the prime focus as the RBI-led monetary policy committee (MPC) meets next on 7 April. A second lowering of interest rates is almost certain, with the first introduced after a gap of nearly five years.

There is no guarantee, however, on how long this rate cut cycle will continue. Inflation can turn hotter any time as the world moves to high tariff walls, crumbling down of post-war institutions and transactional politics, with the US, led by President Trump, retreating from any order that does not serve American interests.  

Malhotra will be up against a world that is in the remaking. The sides are changing, a new realignment is taking shape, and economies are having to search for new market spaces. The US has just reversed its position from a firm Europe-NATO-Ukraine alliance against a ‘warring’ Russia to a soft corner for President Vladimir Putin. Trump is willing to side with Putin in Russia’s war against Ukraine while dumping Europe in the negotiation talks for peace. No more NATO, no more defence support for Europe, no more resistance against plentiful fossil fuels. Russia and the Middle East are only happy to hear Trump’s ‘drill, baby, drill’ slogan.

Under Trump’s weaponisation of tariffs and ‘America First’ policy, the US dollar has got new ammunition to live strong against other currencies, including the Indian rupee. Even as Trump’s reciprocal tariffs take root, fear of rising prices have started spreading and gold prices have hit record highs. In a muscle-flexing America which is interested only in creating wealth for itself, China, the second-largest economy, may find space to manoeuvre in many markets that feel bullied and suffocated.

In such a rapidly changing landscape, it looks like the global headwinds will keep throwing up new hurdles for Malhotra even as he seeks to continue with a monetary policy that keeps borrowing costs low and spurs growth. There are too many external things that can tip the market over. India has to take care of trade balance, supply chain, inflation, consumer demand and a wide-spread growth.

Uday Kotak, the founder of Kotak Mahindra Bank, has warned of the “vacuum cleaner” effect of US policies, which is pulling foreign capital away, straining the current account and impacting the exchange rate and liquidity. Capital from emerging markets is moving out due to the impact of a strengthening dollar and rising US Treasury yields above 4.5%, he said, while speaking recently at the group’s flagship investor event, Chasing Growth 2025.   

Earlier, Malhotra, while lowering  the repo rate from 6.5% to 6.25% in his maiden MPC policy meet in February, raised a few red flags. He mentioned of a highly unpredictable economic order and the direct impact it can have on “growth, investment decisions and consumption expenditure that get deferred”. Oil prices can be volatile, geopolitical tensions can rise and trade policies can turn adverse at any moment. In Trump’s order, everything is in a state of flux. So, how can you plan a rate cut that stretches over a slighty long period of time? 

How much has the first repo rate cut helped in moving the needle of growth? Has the government’s provision in the budget of raising the personal income-tax threshold to Rs 12 lakh lifted consumer demand? The data on growth or consumption demand is not out yet and one has to wait for the lag effect to start working. Meanwhile, the Indian stock markets have continued to slide and the rupee is still fragile against the dollar.

So, a third successive repo rate cut, in June? Maybe. Maybe not. Analysts have varying estimates ranging between 50 basis points to 75bps, with a terminal repo rate of 5.75% or 5.50% by end-2025. The swing will, however, be difficult to spot at this stage. Malhotra will not only have to consider food inflation, which he hopes to be favourable. He will also have to weigh in flight of foreign capital, a wobbly rupee, trade wars, tight liquidity, financial stability,  and economic growth. A lot of variables, these.

Take the rupee, for instance. The Indian currency sank to a record low of 87.95 per US dollar on 10 February before staging a mild recovery, but continuous foreign portfolio outflows has kept it weak as it struggles to hover around 87 levels. With foreign investors having sold over $11 billion of local equities in 2025, the rupee has become one of Asia's worst-performing currencies. The RBI’s interventions have provided some protection but the thinking of Malhotra has been to allow the market forces to decide the value of the rupee while still intervening in the foreign-exchange market to smoothen “excessive and disruptive volatility”. When the RBI goes out to sell dollars to stabilise the Indian currency, the impact it leaves behind is a tightening of the rupee liquidity in the system.

There is a link between currency pressures and inflation arising from costlier imports. As per RBI estimates, every 5% depreciation in rupee can push up inflation by 35 basis points (bps) over several months. And, a lowering of interest rates can make foreign capital inflows difficult as the interest rate differential between India's benchmark 10-year bond yield and that of the US Treasury yield has narrowed. This is the vicious cycle Malhotra will have to break.

Banks are also having to manage liquidity crunch even as credit has been growing faster than deposits over the last several quarters. Since mid-December, liquidity has been in deficit and got to peak at Rs 3.3 lakh crore on 23 January, the highest since 2010. The situation improved and the deficit stood at Rs 2.1 lakh crore, as on 20 February. A tight liquidity may make several banks delay lending rates and slow credit growth, particularly when deposits aren’t easy to mobilise at the required pace and stiff competition is making banks reluctant to lower rates in a hurry.

The RBI is taking measures to infuse liquidity in the banking system. The central bank has announced a three-year dollar-rupee buy/sell swap of $10 billion to take place, following up on a six-month swap of $5billion conducted last month. The RBI has also, over the last five weeks, bought Rs 1 lakh crore of bonds via open market operations and another Rs 38,800 crore via secondary market purchases. Another Rs 1.83 lakh crore has been injected  via long-term repos. 

In a climate where storms are brewing in every corner, the battle over liquidity, rupee stability, lowering of interest rates, growth and inflation will be long drawn.

So, where does this leave Malhotra? While his predecessor Shaktikanta Das had to fight against a Covid-ravaged economy and high inflation, the new RBI Governor's challenge will be to guide the central bank through an uncertain phase which is seeing the world redraw its politics and economics.

In an interview with the Financial Times, Pierre Wunsch, Governor of the Central Bank of Belgium, said the European Central Bank must not ‘sleepwalk’ into too many interest rate cuts. Malhotra may think along similar lines and keep the repo rate cut decision open, probably after the April policy.