RBI Points to US Tariff Threats Against Softer Inflation Forecast

New Delhi, August 29, 2025 -The Reserve Bank of India (RBI) in its August bulletin pointed to serious downside risks to domestic demand emanating from the high 50% U.S. tariffs on Indian imports even while it confirmed a flutter of hope regarding softening inflation and sustained rural demand.

Tariff Shock Threatens Q1 Growth as 50% U.S. Duties Hit Textiles, Gems, Footwear, and Furniture Exports

The RBI cautioned that uncertainties over India-U.S. trade policies continue to be a major headwind. From August 27, the U.S. has imposed 50% punitive tariffs on Indian merchandise, covering industries ranging from textiles, gems, footwear, and furniture. The tariffs have the potential to destroy growth momentum and impact labor-intensive exports.

At the same time, the Indian economy is seen to have cooled to a 6.7% year-over-year increase in Q1 (April–June) from 7.4% in the previous quarter. Policymakers, however, continue to predict a full-year growth close to 6.5% as driven by robust consumer demand, benign monsoons, and support from the government.

Retail Inflation Plunges to 1.55% in July, While S&P Upgrade Boosts Capital Inflows and Bond Stability

Inflation trends remain encouraging. July’s retail inflation fell to 1.55%, the lowest in nearly eight years, driven by plunging vegetable and pulse prices. The average inflation outlook for FY26 has been revised down to 3.1%, below both the RBI’s earlier estimate and its 4% target.

The RBI also pointed out that India’s upgrade to a ‘BBB’ sovereign rating by S&P would be supportive of capital inflows and assist in retaining smoother bond yields.

Strong Rural Demand and Kharif Growth Cushion Economy Against External Shocks

Robust kharif sowing backed by timely rains, rising real rural wages, and transmission of earlier rate cuts are expected to sustain demand. Coupled with support from fiscal spending, favorable financial conditions, and upbeat household sentiment, these factors provide a strong buffer against external shocks.

RBI Maintains Neutral Monetary Policy Amid Mixed Inflation-Growth Signals

Even after encountering outward challenges, the RBI sticks to a neutral stance of monetary policy, in line with its even-handed assessment of inflation and growth risks. Governor Sanjay Malhotra stressed continued caution as the central bank considers new data and changing domestic inflation-growth patterns.

With 50% U.S. tariffs posing risks to exports and slowing Q1 growth, the RBI highlights that softening 1.55% inflation, strong rural demand, and supportive fiscal measures provide stability, while the central bank maintains a neutral monetary stance amid evolving domestic and global economic conditions.

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