Donald Trump’s 90-day tariff pause and a cooling inflation almost guarantees two more successive interest rate cuts; RBI Governor Sanjay Malhotra’s reign, however, coincides with a topsy-turvy world, gone chaotic and in process of being rebuilt through complex formations.
Just when the global economy showed signs of sinking to a level not many would have earlier imagined, Reserve Bank of India Governor Sanjay Malhotra announced on 9 April a cut in benchmark interest rate by 25 basis points for the second straight time.
As Malhotra and other members of the monetary policy committee (MPC) assembled for their first-day meeting on Monday, markets across the world crashed amid concerns of a trade war and fears of a recession due to US President Donald Trump’s sweeping tariff proposals. In India, Dalal Street saw an erosion of investors’ wealth by over Rs 13 lakh crore.
The ‘Black Monday’ on 7 April saw the world's 20 richest individuals lose a cumulative $45.9 billion, according to the Bloomberg Billionaires Index. While India's richest person Mukesh Ambani saw his net worth erode by $3.5 billion to $83.4 billion, Gautam Adani, the second-richest, had his wealth drop by $4.26 billion to $70 billion.
The turbulence was felt even before ‘Black Monday’ came. After President Donald Trump announced the ‘liberation day’ tariffs on 2 April, a whopping $6.6 trillion evaporated off Wall Street in just two days. Seen as the highest US tariffs since 1930s, the stock exchanges in Asia and Europe also plunged into turmoil, making this the sharpest fall across global stocks since the Covid-19 pandemic in 2020. In India, Rs 10 trillion in market value was wiped out on 4 April.
As fate would have it, the three-day MPC meeting was supposed to conclude on the day Trump’s reciprocal tariffs were to kick in. But then the storm unexpectedly receded and Trump announced a 90-day pause on new tariff rates on imports from most US trade partners. The baseline 10% import tax would, however, run across the board. Trump targeted China and the US raised tariffs imposed on imports from that country to 125% with immediate effect.
The 90-day tariff pause has only made Malhotra’s task easier to decide on which way the RBI needs to move at this stage. Coupled along with inflation which is tending to moderate, this has almost guaranteed two more successive interest rate cuts in the upcoming June and August monetary policies. The MPC, chaired by Malhotra, has already brought down the repo rate from 6.50% to 6% in two equal tranches of 25 basis points, with the first introduced after a gap of nearly five years since May 2020.
Malhotra has ruled out the possibility of a rate hike in the current scenario while explaining the change in RBI’s monetary stance from 'neutral' to 'accomodative'. He has said that going forward, absent any shocks, the MPC will consider only two options – status quo or a rate cut.
The easing interest-rate cycle is unlikely to end in a hurry as Trump’s tariff war unleashes uncertainty in economies across the world. Central banks seem to be more concerned about economic growth than on inflation. The RBI, in fact, has lowered the GDP growth forecast for 2025-26 to 6.5% from 6.7% earlier while projecting inflation to decline to a comfortable level of 4% from its previous prediction of 4.2%.
Malhotra said the growth forecast was lowered primarily because of the tariff-related uncertainties.
On fears of a global economic slowdown, oil and natural-gas prices have fallen sharply, which will be beneficial to importing countries like India. And the rupee, which was weakening against the dollar, seems to be holding on.
But if Trump decides to go ahead with high tariffs after 90 days, central banks will have to handle disruptive forces. Several economists have warned of a major global economic slowdown and a recession in the US as countries weigh retaliatory tariffs. European countries will have a tough balancing task at hand while China and the US intensify their trade war. The fight for global trade supremacy between the top two economic powers is imminent.
As per a forecast by researchers at the Oxford Economics consultancy made before Trump announced a 90-day pause, the tariffs fallout could lead to global GDP growth falling below 2% this year from 3.2% in 2024. Barring the Covid pandemic, this will be the weakest rate since the 2008 financial crisis.
Europe, China and other parts of the world will not find themselves spared from the slowdown, with economists predicting some countries even being pushed to recession. Oil prices have slid to their lowest levels since 2021 on signals that global demand could suddenly slow.
Across the globe, central banks will have to quickly come to terms with a trade war that slows economies, raises consumer prices, realigns supply chains, impacts currency values and disrupts post-World War II trade blocs.
Malhotra will be caught in the midst of this ill-defined and unpredictable world order. His predecessor, Shaktikanta Das, had to steer an interest-rate policy through the difficult and uncertain times of Covid and post-Covid recovery. But he could work out on a balance between inflation-growth dynamics with a lot less of variables after considering the Russia-Ukraine war and geo-political hostilities, which later ran on a predictable course. Malhotra’s reign as RBI Governor, however, coincides with a topsy-turvy world, gone chaotic and in the process of being rebuilt through complex formations.
Trump’s reciprocal tariffs on its allies and enemies alike will change the world, make foreign policies transactional rather than historical, ideological or partnership-driven. When the US imposed a 10% tariff on its ally Australia, the country’s Prime Minister Anthony Albanese said “this is not the act of a friend”.
Relationships have thus opened up and America’s old allies such as Canada, Japan, South Korea, Australia, European countries and the UK are looking to move more to trade multilateralism. They will also have to figure out how they can work with China without antagonising the US on more trade flows and investments. India has kept its cards close to its chest and is continuing to engage in bilateral negotiations with the Trump administration.
In many ways, Trump reflects economic structures that have gone brutal, are less humane and highly unequal. Unmoved by the economic turmoil that has prevailed after his tariffs weaponisation, the 78-year-old President has said that “this is a great time to get rich” and “only the weak will fail”. He has emphasised that his “policies will never change” and, touting the sweeping tariffs as the “Liberation Day”, he refers to the selloff pain as being temporary and it “is like when a patient gets operated on” and “I think it’s going very well” and trillions of dollars in investment is going to “come into our country” from companies that want to make their products in the US to avoid tariffs.
Trump believes that this is the way to revitalise America’s industrial heartlands and bring back manufacturing jobs as multinational companies get encouraged to relocate their factories and supply chains to the US. He also wants to make the US a destination for the affluent class with a $5 million ‘Gold Card’ visa, offering permanent residency in America and a route to citizenship.
Trump intends to use the huge revenue windfall from tariffs to “reduce our taxes and pay down our national debt” and “we are finally going to be able to make America great again”. Though in pursuit of this he wants interest rates to be cut, Federal Reserve Chair Jerome Powell has warned that tariffs would likely push up inflation and cool growth.
If Trump stays rigid in his ‘reciprocal tariffs’ stance, the rest of the world will have to plot countermeasures. The conversations between nations at a bilateral level is expected to soon pick up as the trade war starts hitting growth, jobs and prices.
The other block to keenly watch is currency movements. The dollar is expected to gain on the back of the US imposing higher tariffs, but it has not quite gone that way. The euro, in fact, has gained against the dollar and the rupee has found support. Some industry-watchers have even said that the days of the dollar being a safe haven are over.
In the shadow of Trump’s tariffs, Malhotra will have to closely keep watch on growth, inflation, liquidity management, the rupee movement and realignment of the global economy.
