RBI’s monetary policy panel should wait for the US tariff blitz’s dust to settle

While China promptly announced a retaliatory tariff of 34% and stock market indices crashed in response, the central banks of most major targets are still watching the rapidly unfolding situation. The Indian stock market, which seemed less skittish than others last week, took a hard tumble on Monday, just as the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) began its three-day policy review.

Also Read: Vivek Kaul: ‘Stupid, stupid, stupid’ is the only way to describe US tariffs

In such a scenario, how should the panel respond? Should the MPC opt for a deep rate cut in defence of GDP growth? Or should it follow the example of central banks elsewhere—such as the US Federal Reserve, Bank of England and People’s Bank of China—that have opted not to act yet?

Unlike many other countries, India is still hopeful of negotiating a bilateral deal with the US that could possibly save us from the worst effects of the 26% tariff imposed on US-bound exports. How soon this will work out, if it does, remains unknown. What’s known, however, is that the world order being taken apart by Trump’s ‘America First’ policy will hit both growth and inflation adversely across the world.

Growth will almost certainly drop. The International Monetary Fund has warned of a “significant risk” to the global economy. Supply-chain havoc is likely to raise prices too, placing stagflation on the cards. And if the US slips into a recession—defined as two successive quarters of GDP contraction—then other economies will suffer knock-on effects. Although India’s economy is only lightly integrated with the world’s, what all this means for our output expansion and cost of living is hard to predict.

Also Read: Despite tariff heat, policy easing to stay on track

What will RBI Governor Sanjay Malhotra, chairing his second policy meeting, make of this uncertain scenario? And what will be the view of Poonam Gupta, who was recently appointed deputy governor in charge of monetary policy? ‘Trial by fire,’ is how former governor D. Subbarao described his early days at RBI’s helm in the aftermath of the 2008 financial crisis. Today’s situation is no less challenging.

The answer is not to respond in haste. Here, central banks have an advantage over elected governments that are subject to populist pulls and pressures. Monetary authorities can afford to look through demands that do not serve the country’s long-term interests. As RBI grapples with the trade-off between growth and price stability, it may be tempted to match its quarter-percentage-point rate cut in February with another one now. Since RBI had pivoted to growth-support before Trump’s 2 April tariffs, a follow-up cut may seem like a done deal. The last MPC meeting’s minutes seemed to suggest as much. Since then, our growth prospects might have dimmed more than the odds of keeping inflation capped at 4%.

Also Read: MPC review: Rate cut not ideal yet. Rely on surplus liquidity and operation twist instead

Yet, even as a clamour arises for a deeper-than-usual cut, the panel ought to wait. Not indefinitely, but for long enough to let the dust settle a bit. The outlook has turned hazy on both the key variables it monitors, not just one. In this context, inaction coupled with the promise of prompt action once the situation warrants may be RBI’s best option.

To critics, and there will surely be many, Malhotra could always respond by citing John Maynard Keynes. “When the facts change, I change my mind. What do you do, sir?”