​A cut in time: on RBI and repo rate cut  

The Reserve Bank of India (RBI)’s Monetary Policy Committee’s unanimous decision to cut the repo rate by 25 basis points, to 6%, is a timely reprieve for India’s business community. For weeks now, exporting sectors have been imploring the government to hasten bilateral trade negotiations with the U.S. to attempt to shield themselves from President Donald Trump’s “reciprocal” tariffs. The tariffs have been paused for 90 days, except for the 10% universal tariff, which is still applicable. The pause, even while raising tariffs against China to 125% in a trade stand-off with Beijing, suggests a strategy pivot to stem the massive sell-off of U.S. treasury bonds and the gutting of trillions of dollars in American stock valuations. Worried about an economic slowdown as investor sentiment turns negative, the RBI has changed its stance from “neutral” to “accommodative” that could indicate further rate cuts are likely. A decrease in the repo rate will most likely be reflected in loan service reductions for businesses, homeowners and retail borrowers, as banks pass on the rate cut. This began happening hours after the rate cut announcement. The central bank hopes this rate reduction ensures liquidity for businesses in a time of uncertainty, so that they can continue investing in the real economy even as they attempt to diversify their exports.

More ominous, however, is the RBI’s lowered GDP growth estimates for the current fiscal, from 6.7% to 6.5%. This indicates that despite the RBI’s growth stimulus, steadily declining retail inflation — down to 3.61% in February — and steep falls in food staple prices, the central bank expects a growth contraction due to the uncertain economic climate. It is a universally accepted economic principle that stable governance, along with a predictable policy framework, is a necessary condition to foster growth. It would be no exaggeration to say that this principle has been turned on its head since Mr. Trump’s return as President. China’s move to impose retaliatory tariffs, totalling 84%, signals the beginning of a full-blown trade war, the likes of which the world has not witnessed since the Smoot-Hawley Act of 1930. Those tariffs, with objectives similar to the current ones — to protect American farming and manufacturing — ushered in an era of economic nationalism in the inter-war years, hitting global trade and contributing significantly to the Great Depression. Perhaps a lesson for nations must be that protecting one’s own economy can be achieved without hurting others, so long as countries recognise their competitive advantages and build on them. In America’s case, it is doubling down on research, education and innovation.