Overview
In 2025, under new governor Sanjay Malhotra, the Reserve Bank of India (RBI) has cut its key repo rate by a cumulative 125 basis points—from 6.50% in early February to 5.25% on December 5—marking its most aggressive easing since 2019. The latest move combined a 25 bp cut with roughly $16 billion of liquidity injections via open‑market bond purchases and a three‑year dollar–rupee swap, as the RBI sought to lock in what Malhotra calls a “rare Goldilocks period” of sub‑target inflation and upgraded growth prospects.
Yet this domestic Goldilocks story is colliding with a hostile external environment. Since August 2025, the US has imposed punitive tariffs of up to 50% on a wide range of Indian exports, contributing to a record monthly trade deficit of $41.7 billion in October, sharp rupee depreciation to record lows near ₹88–90 per dollar, and sizeable foreign portfolio outflows. As the RBI continues easing while defending against currency stress, the arc of this story is whether India can sustain high growth and very low inflation without triggering an external‑balance or currency crisis.
Key Indicators
People Involved
Organizations Involved
The Reserve Bank of India (RBI) is India’s central bank, responsible for monetary policy, financial stability and regulation of key parts of the financial system.
The Union Government of India shapes fiscal, trade and structural policies that interact with RBI’s monetary stance and with external shocks such as US tariffs.
The US Government, under President Trump, has become a central external actor in India’s macroeconomic outlook through aggressive use of tariffs.
Timeline
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RBI cuts repo to 5.25% and announces $16B liquidity boost
Monetary Policy DecisionThe MPC unanimously cuts the repo rate by 25 bps to 5.25%, taking total 2025 easing to 125 bps, and unveils ₹1T of bond purchases plus a $5B three‑year FX swap to inject up to ~$16B into the banking system. Growth forecasts are raised to 7.3% and inflation lowered to 2%, as Malhotra characterises India’s economy as in a ‘rare Goldilocks’ phase despite rupee weakness near record lows.
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India posts record $41.7B monthly trade deficit
Macro DataOfficial data show India’s October 2025 trade deficit widening to a record $41.68B as exports fall 11.8% y/y—hit by US tariffs—while imports surge 16.6% on strong domestic demand and bullion purchases. Analysts warn of current‑account and rupee pressures.
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Inflation undershoots sharply; October CPI near zero
Macro DataRetail inflation prints at an unprecedented 0.25% in October, aided by base effects and falling food and fuel prices, pushing headline CPI below the RBI’s lower tolerance band and reinforcing expectations of further easing.
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RBI holds but cuts inflation forecasts, hints at December move
Monetary Policy DecisionThe MPC keeps the repo at 5.50% for a second meeting, maintains a neutral stance and lowers its FY26 inflation projection to 2.6%. Officials signal that if disinflation persists, a December rate cut is on the table.
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GST cut boosts imports and domestic demand
Fiscal PolicyA substantial cut in India’s goods and services tax, effective late September, fuels festive‑season consumption and contributes to a surge in gold and other imports, setting the stage for a record trade deficit a month later.
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Rupee hits record low as US tariffs bite and FPIs exit
Market MoveThe rupee slides to a record low around 88.44 per dollar, making it Asia’s worst‑performing major currency in 2025. Analysts cite punitive US tariffs, heavy foreign investor outflows and concerns over the widening trade deficit.
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RBI pauses at 5.50% but eases CRR
Monetary Policy DecisionThe August MPC meeting keeps the repo rate at 5.50% with a neutral stance after three consecutive cuts, while implementing a phased 100 bp CRR reduction to 3% to support liquidity as global uncertainties rise.
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Trump administration unveils steep tariffs on Indian exports
Trade PolicyThe US announces sharp tariff hikes on Indian goods, with some sectors facing combined duties near 50 percentage points, citing India’s trade surplus and ties with Russia. The move hits labour‑intensive industries such as shrimp, textiles and gems.
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RBI surprises with 50 bp ‘jumbo’ cut to 5.50%
Monetary Policy DecisionIn its June meeting the MPC cuts the repo rate by 50 bps to 5.50%, the largest move since the COVID‑19 emergency, and shifts stance back to neutral. Inflation forecasts are revised down to around 3.7% for FY26, while growth is kept at 6.5%.
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Second cut and shift to accommodative stance
Monetary Policy DecisionThe RBI trims the repo rate by another 25 bps to 6.00% and changes its stance from neutral to accommodative, lowering FY26 growth and inflation forecasts while flagging global trade tensions and emerging US‑tariff risks.
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RBI delivers first rate cut in nearly five years
Monetary Policy DecisionThe MPC unanimously cuts the repo rate by 25 bps to 6.25%, citing easing inflation and still‑soft growth. Malhotra keeps a neutral stance, signalling that further cuts are possible but not guaranteed.
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Malhotra takes charge amid slowing growth and high inflation
Macro ContextMalhotra assumes office with GDP growth down to about 5.4% and inflation above 6%, after his predecessor kept rates at 6.5% while easing liquidity via a cash‑reserve‑ratio cut. Economists anticipate rate cuts by spring 2025.
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Sanjay Malhotra appointed RBI Governor
Leadership ChangeIndia’s Appointments Committee of the Cabinet names Revenue Secretary Sanjay Malhotra as the 26th RBI Governor for a three‑year term, replacing Shaktikanta Das and raising expectations of a shift toward more growth‑oriented monetary policy.
Scenarios
Soft-Landing Goldilocks: Growth Holds Above 7%, Rupee Stable, Easing Cycle Ends at 5.00–5.25%
Discussed by: RBI commentary, Reuters and FT coverage, domestic sell-side economists
In this scenario, the combination of low inflation, robust domestic demand and contained external pressures allows RBI’s December move to mark either the end or near‑end of the easing cycle. Inflation gradually drifts back toward, but not above, the 4% target as base effects fade, while GDP growth stays around 7–7.5% thanks to lower borrowing costs and resilient investment. US–India trade talks achieve at least a partial rollback or softening of the 50% tariffs by mid‑2026, easing export pressures and stabilising the current account. The rupee trades in a relatively narrow band around 88–90 per dollar, supported by India’s large FX reserves and measured RBI intervention. Under this path, RBI holds at 5.25% or trims once more to 5.00%, then pauses through 2026.
External-Balance Squeeze: Tariffs Persist, Trade Deficit Stays Record-High, Forcing an Early End to Easing
Discussed by: Indian banks’ research (IDFC FIRST, Ind-Ra), macro strategists quoted in domestic business press
Here, US tariffs remain at 50% through at least March 2026, keeping exports under pressure while GST cuts and strong consumption continue to fuel import demand. The current‑account deficit widens toward or beyond 1.6% of GDP, as flagged by local bank research, and the rupee weakens past ₹90–92 per dollar. FPI outflows persist, making the rupee Asia’s worst‑performing major currency for a second year and forcing the RBI to step up FX intervention, drawing down reserves more sharply than planned. Under this stress, the central bank is compelled to halt further rate cuts and may even hike modestly or deploy quasi‑capital‑control measures (such as tighter external commercial borrowing rules) to stem pressure. Growth decelerates to the mid‑6% range as real rates back up and external financing becomes more expensive.
Inflation Rebound: Currency Pass-Through and Fiscal Stimulus Force RBI Back to Neutral or Tightening
Discussed by: Comparisons to the 2019 easing cycle in Business Standard and analyst commentary on base effects
Despite today’s near‑zero inflation prints, past cycles show that aggressive easing can be followed by an inflation rebound once output gaps close and currency depreciation passes through to import prices. If the rupee’s weakness and GST/fiscal stimulus push core and food inflation back toward or above 4–5% in late 2026, the RBI could face a replay of 2019—when it cut by 135 bps and then abruptly paused as inflation spiked. Under this outcome, the central bank would need to abandon further cuts and possibly hike back toward a 5.75–6.00% repo, weighing on housing and credit growth. Bond yields would rise, partially reversing this year’s rally, and the Goldilocks narrative would shift toward a more conventional trade‑off between inflation control and growth.
Currency Shock and Confidence Crisis: India Avoids but Edges Closer to a Classic EM FX Episode
Discussed by: Global EM strategists drawing parallels to Turkey and the 1997–98 Asian crisis
A lower‑probability but high‑impact risk is that a confluence of persistent tariffs, global risk‑off sentiment and domestic political shocks triggers a sharper rupee sell‑off, similar to episodes seen in Turkey in 2018 or parts of Southeast Asia in 1997–98. If the rupee were to lurch well beyond ₹95–100 per dollar and FX reserves fell rapidly due to intervention, markets could question the sustainability of India’s external position. RBI would then have to choose between emergency rate hikes and more draconian steps such as tighter capital‑flow management. While India’s stronger starting position—a relatively modest current‑account deficit, deep local‑currency bond market and ample reserves—makes a full‑blown crisis less likely, this scenario is increasingly referenced as a tail risk in international commentary.
Trade Détente and Extended Easing: Tariffs Rolled Back, RBI Cuts a Bit Further
Discussed by: Optimistic takes in some Indian and regional business outlets, contingent on US–India negotiations
In the most benign case, intense lobbying from US importers and geopolitical considerations lead Washington and New Delhi to strike a limited trade deal by late 2026, phasing out the harshest tariffs. As exports recover and the trade deficit narrows, rupee pressure eases and India’s current‑account deficit stabilises. With inflation anchored near 3–3.5% and external risks diminished, the RBI feels comfortable trimming its policy rate by another 25–50 bps over 2026, inching closer to pre‑tightening levels. This would further support credit growth and investment, consolidating India’s status as a high‑growth, relatively low‑inflation emerging market outlier.
Historical Context
RBI’s 2019 Rate Cut Cycle and Subsequent Pause
February–December 2019What Happened
In 2019 the RBI, then under Governor Shaktikanta Das, cut the repo rate five times in a row, reducing it by a cumulative 135 bps to 5.15%, its lowest level in nine years, in an effort to counter a sharp growth slowdown. However, when inflation later spiked and remained above the target band, the central bank surprised markets in December by pausing further easing and signalling caution, despite continued weakness in activity.
Outcome
Short term: The rate cuts provided limited relief to growth as transmission through the banking system was slow; inflation remained contained initially but later rose sharply, forcing the RBI to reassess.
Long term: The episode reinforced the bank’s emphasis on real rates and inflation targeting, and it illustrated how quickly the space for easing can close if price pressures return.
Why It's Relevant
The 2019 cycle is a clear precedent for the current easing: the RBI again has cut aggressively in a short span, and the risk is that today’s near‑zero inflation could move back toward target faster than expected, limiting further cuts and potentially forcing a pause or reversal.
The 1997–98 Asian Financial Crisis
July 1997 – 1999What Happened
The Asian financial crisis began in Thailand in July 1997 when the baht’s peg to the US dollar collapsed, then spread to Indonesia, South Korea and other economies. Countries with large current‑account deficits, high foreign‑currency borrowing and fixed or tightly managed exchange‑rate regimes suffered massive currency depreciations—over 50% in several cases—stock‑market crashes and deep recessions, prompting large IMF‑led rescue packages.
Outcome
Short term: Currencies and asset prices collapsed, corporate and banking crises erupted, and output contracted sharply across much of East and Southeast Asia.
Long term: The affected countries overhauled financial regulation, built larger FX‑reserve buffers and often moved toward more flexible exchange‑rate regimes; their experience still shapes how emerging markets manage external shocks.
Why It's Relevant
India today is far more insulated than those crisis economies, but the episode underscores how quickly external imbalances, currency mismatches and confidence shocks can turn a ‘Goldilocks’ narrative into a balance‑of‑payments crisis—especially if monetary policy is seen as too loose relative to external risks.
Turkey’s Lira Crisis and the Dangers of Premature Easing
2018–present (with acute phase in 2018–2019)What Happened
Turkey experienced a severe currency and inflation crisis starting in 2018, when the lira lost around 40–50% of its value amid concerns over President Recep Tayyip Erdoğan’s influence on monetary policy, high external debt and US sanctions and tariffs. The central bank was initially slow to raise rates, then hiked its policy rate to 24% in a bid to stabilise the currency and rein in inflation that had surged above 20%. Subsequent episodes saw renewed pressure whenever policymakers cut rates aggressively despite still‑high inflation.
Outcome
Short term: The lira’s collapse fuelled a spike in inflation, a recession and stress in Turkey’s highly dollarised corporate sector, forcing belated and painful rate hikes.
Long term: Turkey’s experience has become a cautionary tale about undermining central‑bank credibility and easing policy into external and political turbulence, with lingering risk premia and currency fragility.
Why It's Relevant
For India, Turkey illustrates the downside of cutting rates too aggressively when facing external shocks and FX pressure. The RBI’s emphasis on keeping a positive real policy rate and large reserves is partly designed to avoid a Turkish‑style loss of confidence, but the comparison is increasingly raised by global investors when rupee weakness and political pressure coexist with easing.