Expect RBI to walk its accommodative talk as risks rise

US tariff-led global trade uncertainty makes a rate cut in support of India's GDP growth likelier

- UPASNA BHARDWAJ

The monetary policy committee's (MPC) review this week takes place in the backdrop of a fragile global environment. The recent tariff hikes by the United States and retaliatory measures by others pose the risk of a severe global economic slowdown, elevated inflation and trade disruptions. The world economy is expected to continue grappling with the spillover effects from the interplay between trade retaliation and negotiation.

Policy decision-making becomes increasingly difficult amid heightened uncertainty, especially as economies with current account deficits need to balance the contagion risks of capital outflows and currency depreciation. However, we see some key trends emerging over the next few months, which will create room for the MPC to continue on its accommodative policy path.

First, escalating trade tensions and severe uncertainty are providing more and more certainty of sharp downside risks to global growth and upside risks to inflation. While already-elevated and sticky core inflation in the US may constrain the Federal Reserve on the extent of its monetary easing, the deteriorating growth outlook may prompt it into action to soften the severity of a slowdown. As high inflation begins to seep into the US economy, the ripple effects will be felt in corporate profitability and a slide in consumer demand.