After the US-India tariff agreement, the Indian central bank kept the key interest rate unchanged.

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The Reserve Bank of India decided on Friday to keep its benchmark interest rate unchanged, opting to remain on the sidelines after a US-India trade deal eased growth concerns. This decision reflects the central bank’s satisfaction with its current policy stance, believing that economic growth is strengthening and inflation remains moderate.

All six members of the RBI’s monetary policy committee unanimously voted to keep the repo rate at 5.25%, in line with the expectations of most economists surveyed by Bloomberg. The policy stance remains neutral, indicating that the central bank may stay the course for some time.

Central Bank Governor Sanjay Malhotra said in his speech, "The successful conclusion of the trade deal is a good sign for the economic outlook." Senior Indian government officials said this week that economic growth may exceed its highest forecast of 7.2% for the next fiscal year.

According to Xinhua News Agency, Trump said he and Modi have reached a bilateral trade agreement. The US will lower the so-called "reciprocal tariffs" on Indian goods from 25% to 18%, effective immediately, while India will also reduce tariffs and non-tariff barriers on US goods. This unexpected trade agreement has boosted the growth prospects of Asia’s third-largest economy.

Trade Agreement and Fiscal Stimulus Boost Confidence

Trump previously announced that tariffs on Indian goods would be lowered from 50% to 18%, a significant reduction that markedly improved market expectations. As part of the agreement, Indian Prime Minister Modi agreed to stop buying Russian oil and to substantially increase imports of US oil.

The Indian government also increased spending in its budget this week, which helps support the rupee exchange rate and provides more room for the RBI to adjust its policies. In addition to the US agreement, New Delhi also signed a major trade deal with the EU this year.

After the central bank’s decision was announced, the rupee continued its slight upward trend. Indian government bonds extended their losses, as the central bank did not announce any new liquidity measures; the yield on 10-year bonds rose as much as 6 basis points to 6.70%.

Gaura Sen Gupta, an economist at IDFC First Bank, said, "The RBI’s tone shows satisfaction with current policy settings, growth is strengthening, and inflation remains moderate." She expects the monetary policy committee to enter a "long-term pause" mode.

The RBI has cut rates by a total of 125 basis points since February last year, including a 25 basis point cut in December, as inflation has been far below the 4% target. Malhotra expects inflation for the three months ending March 31 to be 3.2%, and it may exceed the target during the first two quarters of the next fiscal year. Malhotra said he would give full-year inflation and growth forecasts after the government releases new data series in April. The Indian government currently expects economic growth in the fiscal year starting April 1 to exceed 7%, while growth for this fiscal year is estimated at 7.4%.

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