As India and the United States finalize their landmark trade agreement, financial markets are turning their attention to the Reserve Bank of India's upcoming monetary policy decision. The RBI's Monetary Policy Committee (MPC) is widely anticipated to maintain the status quo on interest rates during its meeting scheduled from February 4 to 6, 2024.
Why the Rate-Cut Cycle May Be Pausing
Global brokerage firm Bank of America (BofA) has revised its monetary policy outlook following the India-US trade breakthrough. The institution now believes that increased clarity on India's growth trajectory reduces the necessity for further rate reductions by the central bank, potentially marking a temporary conclusion to the rate-cut cycle that has characterized recent monetary policy.
"While there remains theoretical space for the MPC to implement growth-supportive rate cuts, such action was contingent upon India securing a trade agreement with the United States," BofA analysts noted. "This trade negotiation had represented one of the primary sources of uncertainty clouding India's growth outlook. With the deal now finalized, growth certainty has received a substantial boost, allowing the current momentum observed in high-frequency economic indicators to sustain itself."
From Rate Cut to Rate Hold
Consequently, Bank of America has altered its policy call from predicting a 25 basis point rate reduction to anticipating a HOLD position for the February 6 meeting. The brokerage emphasizes that while additional rate cuts may no longer be immediately necessary, the RBI must continue providing liquidity support to facilitate the transmission of previous rate reductions throughout the financial system.
"We maintain the view that the Reserve Bank of India has concluded its rate-cutting phase for the present moment," BofA stated. "However, the central bank will need to carefully manage its liquidity provisions to ensure that rate transmission remains active and effective across lending institutions."
The Trade Deal's Transformative Impact
Previously, Bank of America had maintained that room existed for the MPC to deliver another 25 basis point rate cut, but only if uncertainty surrounding India's trade negotiations with the United States persisted. The finalized agreement has effectively eliminated this particular uncertainty from the economic equation.
According to the brokerage's analysis, the US announcement that both nations will cease purchasing Russian crude oil while expanding purchases from the United States and Venezuela, combined with lowered tariffs on Indian goods, adds significant geopolitical and economic dimensions to the bilateral agreement.
Tariff Reduction and Competitive Advantage
The reduction of top-line tariff rates to approximately 18% provides India with enhanced competitive footing in global trade. This represents a substantial improvement from earlier effective tariff levels that had reached as high as 30–35% when sector-specific duties were fully accounted for.
Bank of America believes that with high-frequency indicators already demonstrating economic resilience and India's export competitiveness improving, the urgency for additional monetary policy support through rate cuts has diminished considerably. Instead, the RBI's focus is likely to shift toward sophisticated liquidity management strategies designed to ensure that past rate reductions are transmitted effectively throughout India's financial ecosystem.
Effective Tariffs Could Drop to 12–13%
One of the most significant economic implications emerging from the trade pact involves the estimated reduction in effective tariff burden on Indian exports. While the headline tariff rate now stands at 18%, BofA estimates that even after accounting for Section 232 duties on strategic products including steel, aluminum, and automobiles, the effective tariff rate could decline sharply to approximately 12–13%.
"Following today's announcements, we estimate that even without considering potential rupee weakness, the impact of 18% tariffs will be substantially mitigated," the brokerage explained. "By our calculations, accounting for Section 232 tariffs on all affected products remaining in place, we project the effective tariff rate on Indian goods might settle around just 12-13%, representing a dramatic reduction from the nearly 30-35% levels observed previously."
This development would provide meaningful relief to India's export-oriented sectors, particularly labor-intensive industries such as gems and jewelry, textiles, agricultural products, and engineering goods that have faced significant tariff barriers in international markets.
Growth Upside and Policy Implications
The brokerage also identifies potential upside risks to India's FY27 GDP projections of 6.8%, though it plans to conduct a comprehensive review before making formal adjustments to its economic forecasts.
"We already observe reasonable growth in high-frequency economic indicators and expect GDP expansion to benefit further from this trade breakthrough," Bank of America stated.
This improvement in export economics reduces downside risks to India's GDP growth trajectory while simultaneously strengthening external sector stability—both of which represent crucial inputs into the RBI's monetary policy framework and decision-making process.
The Bottom Line: A Shift in Monetary Policy Focus
In essence, the finalized India-US trade agreement has removed one of the most substantial overhangs on India's growth outlook. As growth certainty improves and external risks diminish, the Reserve Bank of India may identify limited justification for implementing further rate reductions.
Instead, India's central bank is expected to concentrate its efforts on calibrated liquidity management and ensuring the transmission of previous rate cuts throughout the financial system. This strategic shift signals that the current rate-cut cycle has likely reached its conclusion, at least for the foreseeable future, as monetary policy enters a new phase focused on consolidation and transmission effectiveness.
Disclaimer: The views and recommendations presented above represent those of individual analysts or brokerage companies, and not of Mint. Investors are advised to consult with certified financial experts before making any investment decisions.
