- Tariffs could slash India's GDP growth by 20-40 basis points
- Some analysts now expect 75 bps more in rate cuts this year
- Lower rates, weaker rupee could be used to revive local demand
MUMBAI, April 3 (Reuters) - India's economic growth could slow by 20-40 basis points in the ongoing financial year due to the latest U.S. tariffs, which would prompt deeper interest rate cuts by the central bank, analysts said.
U.S. President Donald Trump on Wednesday slapped a 26% reciprocal tariff on India, threatening the Reserve Bank of India's (RBI) estimate of 6.7% economic growth in 2025-26 and the government's economic survey forecast of 6.3%-6.8%.
After the tariffs, Goldman Sachs lowered its growth estimate to 6.1% from 6.3%. Citi forecast a 40 bps drag on growth directly and indirectly, while Mumbai-based QuantEco Research estimated a 30 bps hit.
Moreover, with inflation expected to average 4.2% this financial year, close to the RBI's target, the central bank cut interest rates for the first time in five years in February. It is expected to follow that with another 25 bps cut to 6.00% at the conclusion of its April 7-9 meeting, per a Reuters poll.
However, while the poll showed that economists had expected just one more cut after that -- to a policy repo rate of 5.75% in August -- before a prolonged pause, the U.S. tariffs have prompted a rethink to those estimates.
Goldman, Citi and QuantEco Research had also predicted just one to two more cuts this year, but now expect 75 bps of cuts this financial year, taking the policy rate to 5.5%, which would be the lowest since August 2022.
"This would be an appropriate risk minimization strategy on the face of larger downside risks to growth compared to much lower upside risk to inflation," Citi's India chief economist Samiran Chakraborty said in a note late on Thursday.
The growth-inflation dynamics "open up policy space for the MPC (monetary policy committee) to support growth, while remaining focussed on aligning inflation with the target," the MPC said in February.
The Indian economy's growth is expected to have slowed to a four-year low of 6.5% in the financial year ended March 31, as urban demand weakened due to high inflation, tight liquidity and tougher RBI rules slowing loan growth across personal loans and credit cards.
The central bank has, however, significantly eased liquidity conditions since new Governor Sanjay Malhotra took over in December. Plans to further tighten banking regulations have also been pushed back.
Alongside this, the government announced a tax relief for all Indians earning up to 1.2 million rupees a year in its annual budget in February.
The tax cuts and monetary policy easing will help domestic demand, said a government source who asked not to be identified.
These should act as buffers for the economy, the source said, adding that India sees no need for an economy-wide stimulus at this stage but sector-specific stress could be addressed through targeted measures.
"Rewriting of trade rules would prompt policymakers globally to take a hard look at reviving domestic consumption and demand," said Vivek Kumar, economist at QuantEco Research.
For India, this could be through interest rate cuts and a weaker currency, he said.
Reporting by Ira Dugal; Editing by Varun H K
Source: Reuters