The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) met in August 2025 at a time of robust domestic momentum and growing global challenges. The outcome, a status quo across policy rates, underlines the central bank’s confidence in the macroeconomic fundamentals but also its concern over looming global trade tensions, particularly the escalating US tariff threat. Here’s an in-depth look at recent data, the RBI’s decision, and what it all means in the current climate.
India’s Macroeconomic Landscape: Growth Holding Steady, Inflation Tamed
Growth:
India’s economy continues to outperform most global peers. GDP expanded by 7.4% (YoY) in the concluding quarter of FY2024-25 and posted 6.5% growth over the full year, driven by resilient consumer demand and private investment. For FY2025-26, multiple agencies and the RBI maintain a growth forecast of 6.5%, supported by robust rural and urban demand, steady government capex, and strong performances in services and manufacturing sectors.
Inflation:
Consumer price inflation (CPI) touched a six-year low of 2.1% in June 2025, thanks largely to easing food prices, favourable weather, and prudent policy interventions. The RBI projects inflation at 3.1% for FY2025-26, within its comfortable range, despite some expectations of a moderate rise later in the year.
Domestic Confidence:
Equity markets are buoyant, and retail participation is at an all-time high, showcasing strong faith in India’s long-term story. Capital flows have remained steady, and the rupee stable, despite global headwinds.
Highlights from the August 2025 MPC Decision
- Repo Rate: Kept unchanged at 5.5%, as the full effect of earlier 100bps rate cuts (between February and June 2025) is still working through the economy.
- SDF/MSF/Bank Rate: Also left unchanged at 5.25% and 5.75% respectively.
- Policy Stance: Neutral, allowing flexibility to respond to incoming growth and inflation signals.
- Growth Forecast (FY26): Retained at 6.5%.
- Inflation Forecast (FY26): Sharply revised downward to 3.1%.
- Liquidity: Banking sector liquidity remains sufficient, and no further interventions are planned for now.
Why the Status Quo? RBI’s Rationale in Context
- Inflation Under Control: With inflation below target and projected to remain moderate (barring major food price shocks), there is no urgency to further ease policy.
- Growth Trajectory: Stable, Yet Cautious: Robust domestic demand is expected to keep growth close to potential, but external risks—especially on trade—warrant vigilance.
- Transmission In Progress: Recent rate cuts are still trickling into the broader economy. Premature further easing could stoke asset bubbles or misalign financial markets.
The Looming Threat: US Tariffs and India’s Global Trade Risks
Background:
US President Donald Trump imposed a blanket 25% tariff on Indian goods in early August 2025, with warnings that rates could rise “very substantially” due to India’s continued purchases of Russian oil. This comes at a critical time, as the US is India’s largest export market and a core trade partner, with exports spanning textiles, gems, pharmaceuticals, auto parts, and more.
Direct Impact:
- Key export sectors, especially textiles, apparel, diamonds, auto components, and some electronics, face significant headwinds. Tariffs on Indian goods are now materially higher than for other Asian competitors, risking market share loss.
- Nominal GDP growth forecasts for FY26 have already been revised downward by 20-30 bps by ratings agencies like ICRA and SBI Research due to these risks. A further escalation in tariffs or penalties (related to Russian oil) could increase the drag.
- Most Indian pharma and petroleum exports are currently exempt, but extension of tariffs to these segments would pose a much bigger challenge.
Broader Implications:
- The Indian government and the RBI acknowledge the uncertainties. Governor Malhotra flagged that while some impact has been factored into growth forecasts, the overall effect remains hard to predict without further developments.
- Despite risks, India’s diversified export basket, strong domestic demand, digital competitiveness, and ongoing trade negotiations (especially with the UK and EU) offer key buffers.
- For the US, there are also risks: higher tariffs on Indian goods could push up US consumer inflation and disrupt global supply chains, potentially prompting renegotiation or moderation in approach.
What Does It Mean for the Indian Economy, Citizens, and Investors?
Indian Economy
- Short-Term Stability, Medium-Term Risks: The MPC’s decision keeps credit conditions stable and supports ongoing domestic growth. However, if US tariffs persist or intensify, pressure could mount on exports and the current account, risking downward revisions in growth estimates later in the year.
- Policy Caution: The RBI is likely to remain highly data-driven, with future moves dependent on the actual impact seen from tariffs and global volatility.
Citizens
- Loan Rates and Incomes: Borrowing costs including EMIs are expected to remain steady for now. Job and income stability in export sectors may face near-term uncertainty. However, strong domestic consumption and resilient rural demand provide a partial cushion.
- Inflation Outlook: Price stability is likely to persist, though disruptions to supply chains or rupee depreciation (if trade pressures persist) could push up imported inflation by year-end.
Share Market
- Sentiment Buoyed by Stability: Investors are reassured by the RBI’s steady hand and India’s solid macro data, which offsets some external risks. Domestic-facing sectors are expected to lead gains, while export-reliant companies may see volatility due to trade headwinds.
- Volatility Likely: Sectors like textiles, gems, and auto parts are under watch for earnings pressure. Pharma and IT may prove relatively resilient, given partial exclusion from tariff hikes and a robust global demand pipeline.
Sectoral Impact: Winners and Losers Post RBI MPC & US Tariff Threat
Understanding sector-wise outcomes is critical as the policy pause by the RBI and the recent US tariff announcement create divergence in opportunity and risk across India’s economic landscape.
Sectors Likely to Benefit:
Domestic-Focused Sectors:
- Banking & NBFCs: The RBI’s earlier rate cuts and continued policy stability keep borrowing costs low, supporting credit growth. Stable EMIs and improved liquidity may further enhance profitability and loan demand, especially among PSU and private banks focused on retail and MSME lending.
- Real Estate & Housing: Unchanged home loan rates and predictability in monetary policy maintain buyer sentiment, especially in tier 2 and 3 cities and in affordable/mid-income segments. Residential real estate is expected to see continued demand through the festive season.
- Consumer Goods & Retail: Low inflation boosts disposable incomes, sustaining consumption-driven growth, particularly for FMCG, durables, and retail players.
- Infrastructure & Construction: Stable rates encourage project financing and capital investment, benefitting construction, cement, and building materials companies.
- Rural & Agri-inputs: Favourable monsoons, benign inflation, and policy support continue to drive rural demand and agri-allied sectors.
Sectors Facing Pressure:
Export-Intensive Sectors (under US tariff threat):
- Gems & Jewellery: US tariffs will likely reduce competitiveness, squeezing margins and export volumes. This sector faces immediate and material risk.
- Auto Components: High exposure to US demand means auto part exporters could see a decline in order books and profitability.
- Textiles & Apparel: These industries are highly sentiment-sensitive and could face order slowdowns due to increased landed costs in the US market.
- Seafood & Processed Foods: US remains a key market—tariffs may slow exports and pressure prices.
- Electronics: With India now a major smartphone exporter to the US, tariffs on finished electronics and assemblies could disrupt supply chains and slow momentum for companies reliant on American buyers.
- Refining & Petrochemicals: Penalties or restrictions related to Russian oil imports could raise input costs for refiners and limit profit margins.
Watchlist Sectors:
- IT & Pharma: While partially insulated by services exports and diversified demand, any broadening of US tariffs or downturn in global growth could impact large-cap names—though the direct hit is less immediate than for sectors above.
- Steel & Aluminium: Not directly targeted, but vulnerable to global price and demand swings from overall trade tensions.
- Oil & Energy: Tariff-related penalties on Russian oil could prompt India to diversify suppliers, affecting profit structures for oil refiners and raising future domestic energy costs.
Final Take: Stability at Home, Vigilance Abroad
India steps into the second half of 2025 with a rare combination of low inflation, healthy growth, and high investor confidence. Yet, the shadow of global protectionism especially the unpredictable US tariff regime, requires continuous attention from policymakers and market participants alike.
For now, the RBI’s “wait and watch” policy appears well calibrated. But with global tides turning fast, the coming months will test the resilience and adaptability of the Indian economy more than ever before.
