RBI responds to global trade war challenges

Source: The post RBI responds to global trade war challenges has been created, based on the article “RBI MPC’s rate cut is a signal to support growth amidst global economic turmoil” published in “Indian Express” on 10 April 2025. RBI responds to global trade war challenges.

UPSC Syllabus Topic: GS Paper2-International Relations-Effect of policies and politics of developed and developing countries on India’s interests.

Context: Global trade tensions are rising, creating uncertainty for many economies, including India. In response, the Reserve Bank of India (RBI) has cut interest rates and adopted a growth-supportive stance. This shows concern about slowing growth, both in India and globally, and the need for timely action to support the economy.

For detailed information on India must respond wisely to Trump’s trade read this article here

RBI’s Actions Against the Global Trade War

1. Rate Cuts: The RBI’s Monetary Policy Committee (MPC) reduced the policy rate by 25 basis points. It also changed its stance from neutral to accommodative, indicating the possibility of further rate cuts.
2. GDP Forecast: The RBI lowered India’s GDP growth projection for FY26 from 6.7% to 6.5%, due to the possible adverse effects of the trade war.
3. Inflation Management: It also reduced the CPI inflation forecast for FY26 to 4%, from its earlier estimate of 4.2%, due to easing food inflation.
4. Forex Interventions: The RBI plans to intervene in the forex market to manage volatility. It has a strong buffer of $676 billion in forex reserves, covering 11 months of imports.

Impacts of the Global Trade War on India’s Economy

1. GDP Growth Forecast Reduction: The trade war has already led the RBI to lower its growth forecast.
2. Exports-to-GDP Ratio: India’s economy is less export-dependent, with goods and services exports at 21% of GDP, and goods exports alone at 12%. This is lower than Thailand (65%) and Vietnam (87%), making India less vulnerable to U.S. tariffs, though risks still remain.
3. Direct and Indirect Impact: The trade war could directly reduce India’s GDP by 0.2–0.3%. Indirectly, it could affect global growth, capital flows, and private sector investment, which had just begun to recover post-COVID.

Factors Supporting India’s Economy

1. Normal Monsoon and Agricultural Output: A normal monsoon is expected to boost agriculture, supporting rural demand and economic stability.
2. Tax and Inflation Reductions: A lower income tax burden and reduction in food inflation (from 8.5% in late 2024 to 3.8% in February 2025) are likely to encourage consumer spending.
3. Comparatively Lower U.S. Tariffs: The U.S. imposed a 26% tariff on Indian goods, which is lower than those on China (104%), Vietnam (46%), and Thailand (36%). This opens a window of opportunity for India to increase its export market share in the U.S.

India’s Inflation Outlook

1. Current CPI Inflation: CPI inflation fell to 3.6% in February 2025, from an average of 8.5% between October and December 2024.
2. Food Inflation: Food inflation dropped sharply to 3.8% in February.
3. Core Inflation: Core inflation has stayed low, averaging 3.5% over the past year.
4. RBI’s Projection: The RBI revised the FY26 CPI inflation forecast to 4%, down from 4.2%.
5. External Factors: A normal monsoon and stable global commodity prices may help keep inflation in check.

Impact of Currency and Global Factors on India’s Economy

1. US Dollar Dynamics: From October 2024 to mid-January, the US dollar strengthened 9%, then weakened 6%, creating uncertainty.
2. Yuan and Rupee Fluctuations: The Chinese yuan weakened 4.6% in the last six months. The rupee also weakened by 4.4% between October 2024 and February 2025.
3. Forex Reserves and RBI Action: With $676 billion in reserves, the RBI can stabilize the rupee, expected to trade around 88–89 per USD by the fiscal year-end.
4. Global Uncertainty: Ongoing trade tensions and financial volatility may limit capital inflows, affecting the rupee’s stability and growth outlook.

Question for practice

Examine how the Reserve Bank of India (RBI) has responded to global trade tensions and assess the potential impact of these tensions on India’s economic growth, inflation, and currency stability.