The MPC’s decision is the first scene of a whole new tariff-driven drama

On Monday, as markets tumbled across the world, including in India, fear stalked the streets. Tuesday’s recovery did little to assuage fears that Trump’s ‘sweeping and swingeing’ tariffs and the retaliation—or threats thereof—from trading partners would not upend the existing world economic order, signalling that this is not the end of the story.

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It is against this background of near-complete panic that the Reserve Bank of India’s (RBI) rate-setting Monetary Policy Committee (MPC) met for three days, starting 7 April 2025, to take a call. Remember, the MPC in its present avatar is yet to complete a year. Its three external members were appointed in October 2024, the governor in December 2024, and deputy governor-in-charge of monetary policy less than a week ago.

With no clarity over the end-game, or even whether there is an end-game, and yet at the same time mandated to take a policy decision under the inflation-targeting regime, the MPC meeting, the first this fiscal year, could not have come at a more inopportune moment. Trump’s tariffs add a new and completely unpredictable dimension to the normal growth-inflation trade-off. Worse, they came into effect coincidentally on the same day as the governor’s statement on the MPC resolution, leaving it without the luxury of any lead time to assess their impact before acting.

Yes, there is broad agreement that the tariff-war is likely to raise prices and lower growth. But by how much is anybody’s guess. In such a scenario, there are only two choices before any rate-setting committee—the MPC or FOMC (Federal Open Markets Committee): Seize the moment and act, or wait for the outlook to clear. It’s a bit like trying to drive through dense fog. Either you pull up at the side and wait for the fog to lift before resuming your journey. Or, and this is particularly true if you don’t see any sign of the fog lifting, you drive on regardless, hoping that it will not land you in deeper trouble later.

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Fortune favours the brave, it is said. Which is presumably why the MPC seems to have favoured the latter course. Stating that “there is now greater confidence of a durable alignment of headline inflation with the target of 4% over a 12-month horizon,” while “on the other hand, impeded by a challenging global environment, growth is still on a recovery path,” it opted to throw its weight behind supporting growth. It cut the policy rate by 25 basis points to 6% and changed its stance from ‘neutral’ to ‘accommodative.’ It added the caveat that “the rapidly evolving situation requires continuous monitoring and assessment of the economic outlook.”

The US Federal Reserve, in contrast, seems to be veering towards the former course. “There’s a lot of waiting and seeing going on, including by us, and that just seems like the right thing to do at a time of elevated uncertainty,” said Fed Chair Jerome Powell earlier this week, indicating that the Fed would not rush to cut interest rates. Since then, however, reports have appeared that the Fed too might alter course. It held a closed-door meeting on Tuesday and there is speculation that this could be a prelude to some kind of action on Wednesday, US time.

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This is not surprising. As each country tries to do what it sees as best in its domestic interests, policy divergence is par for the course. RBI Governor Sanjay Malhotra emphasized the “global economic outlook is fast changing. The recent trade tariff related measures have exacerbated uncertainties, clouding the economic outlook across regions, posing new headwinds for global growth and inflation.” However, for reasons that are far from clear, the MPC has not materially altered its growth and inflation projections to reflect “exacerbated uncertainties.” 

On the contrary, it has largely stayed with projections made by the MPC in February (before Trump’s tariffs). The central bank’s growth forecast for 2025-26 has been brought down a tad from 6.7% earlier to 6.5% (in line with the National Statistical Office’s estimate), with inflation reduced from 4.2% earlier to 4% now.

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Whether this is an attempt to reassure ‘Panicans’ or the MPC genuinely believes we will remain relatively unaffected by the tariff tsunami sweeping the world is hard to say. The governor was clearly trying to play down fears. After opening his statement with a reference to the year having begun on an “anxious note for the global economy” and adding, almost in passing, that “some of the concerns on trade frictions are coming true,” his opening paragraph was devoted mostly to RBI’s completion of 90 years this April.

The global economy might have just received what Nobel Prize laureate Paul Krugman calls the “greatest trade shock in history.” But Governor Malhotra showed no sign of being unduly perturbed. That might be just what the doctor ordered to calm the stock market, which was behaving like a cat on a hot tin roof. But whether this will suffice remains to be seen. We are in Act 1, Scene 1. And the plot is constantly changing. 

The author is a senior journalist and a former central banker.