RBI holds rates as tariff shock clouds outlook

India’s central bank retained the policy repo rate at 5.50% on Wednesday and held a neutral stance, choosing to watch the effects of earlier easing and tax changes while new US trade barriers and a soft rupee complicate the outlook.

The Reserve Bank of India’s (RBI’s) six-member monetary policy committee (MPC) voted unanimously to pause, its second straight hold after cumulative cuts of one percentage point earlier this year.

RBI governor Sanjay Malhotra cast the decision as prudence. Domestic inflation has cooled toward the lower end of the 2%–6% band, fiscal measures have only recently worked their way into prices, and external risks have risen.

He acknowledged headwinds from fresh US tariffs on Indian exports, which have unsettled markets and added uncertainty to growth even as activity has held up through the year.

RBI reiterated that the overnight weighted average call rate remains the operational anchor under its liquidity framework and said it will lean on short-tenor operations to keep money-market rates close to the policy rate.

“The MPC’s decision to hold rates today largely hinges on them waiting for clouds to clear around external and domestic uncertainties, including the impact of tariff hikes, GST cuts, and transmission of past easing,” Madhavi Arora, chief economist, Emkay Global Financial Services, said.

“While the no-cut call was unanimous, two external members dissented on the policy stance (favoring an accommodative stance over neutral), hinting at some room for easing ahead, Arora said, adding: “This view is reinforced by policymakers acknowledging potential growth moderation in 2H as tariff effects kick in, noting that the uncertain outlook has created policy space to further support growth.”

Alongside the rate pause, the RBI rolled out a set of regulatory and market-development proposals.

On external commercial borrowings, rules on borrowing costs, end use and reporting issued under FEMA will be rationalized to lower friction for firms that tap offshore debt.

Separately, FEMA regulations on how non-residents establish business presence in India will be simplified, a move aimed at easing entry and cutting red tape for foreign investors.

RBI also announced three consumer-centric steps. First, the bouquet of services offered to Basic Savings Bank Deposit Account holders will expand to include mobile and internet banking without minimum-balance charges, widening no-frills access to digital banking.

Second, the Internal Ombudsman mechanism will be strengthened so that grievance redressal within banks and other regulated entities is more effective.

Third, the RBI Ombudsman Scheme itself will be revised and extended to cover rural cooperative banks, bringing millions of additional customers under a common dispute-resolution framework.

RBI also pushed further on internationalizing the rupee.

Authorized dealer banks and their overseas branches will be permitted to lend in Indian rupees to non-residents in Bhutan, Nepal and Sri Lanka for cross-border trade transactions, creating new INR use-cases in the neighborhood.

RBI will establish transparent reference exchange rates for currencies of India’s major trading partners to make rupee-based pricing and settlements cleaner. And it will allow wider use of surplus balances in Special Rupee Vostro Accounts, adding to an earlier window that let such funds be parked in government securities. Today’s measures extend the menu to high-quality corporate instruments such as commercial paper and bonds.

Earlier in the year, RBI front-loaded easing and the government followed with tax reductions designed to shore up consumption.

Since then, Washington’s new tariff regime has complicated the external picture, prompting bouts of equity outflows and keeping the rupee under pressure.