Yesterday morning I was sipping my usual filter coffee when the notification popped up on my phone: the Reserve Bank of India had cut the repo rate by 25 basis points to 5.25%. On the surface it looked like the most predictable move of the year—every economist surveyed had called it—but the statement that came with it felt different. There was an unmistakable tone of concern that caught my attention.
They actually used the phrase “weakness in some key economic indicators.” Central bankers rarely speak that plainly unless they’re worried. So I put the coffee down and started digging deeper.
A Rate Cut Everyone Saw Coming—But Few Truly Expected to Need This Soon
Let’s be honest: India’s economy was supposed to be the bright spot in an otherwise shaky global picture. We’d just posted an 8.2% GDP print for the July-September that made headlines around the world. Inflation had cooled nicely. So why on earth is the central bank easing already?
The answer lies in what’s happening beneath those shiny headline numbers. And trust me, it isn’t pretty.
The Export Engine Is Coughing
India’s merchandise exports dropped a brutal 11.8% year-on-year in October. That’s not the gentle slowdown some were hoping for. Shipments to the United States—still one of our largest markets—fell 8.5% to $6.3 billion. That’s two straight months of declines.
And before anyone says “it’s just a blip, remember that Washington slapped a 50% tariff on a wide range of Indian goods back in August. Those duties are now fully in effect, and companies I speak with say orders from American buyers have either dried up or been renegotiated at razor-thin margins.
“Many U.S. clients are simply walking away rather than absorb the tariff hit. We’re seeing cancellations for spring 2026 delivery already.”
— Textile exporter in Tirupur (speaking anonymously)
Factories Are Hitting the Brakes
Industrial production in October sank to a 14-month low. The HSBC’s Manufacturing PMI tumbled to a nine-month low in November. These aren’t abstract indices; they translate directly into order books, payrolls, and truck movements on highways.
I’ve found that PMI readings below 52 consistently signal trouble in India (unlike some Western economies that can grow with readings in the high 40s). When it drops to where it is now, small and medium enterprises start laying off contract workers almost immediately.
The Festive Season That Wasn’t
Every year we wait for the September-November festive window to rescue retail and consumption numbers. The government even slashed GST rates ahead of the season to juice demand. October GST collections did jump to ₹1.95 trillion, but November’s numbers came in at a limp ₹1.7 trillion—barely 0.7% growth.
Translation: even deep discounts couldn’t get consumers to open their wallets the way they used to. That’s a red-flag territory for an economy where private consumption is 60% of GDP.
Bank Lending Remains Stuck in Neutral
Here’s the part that really surprised me. Despite an earlier rate cut this cycle, credit growth hasn’t budged meaningfully. ANZ’s chief economist for India put it bluntly: there has not been a “major pick up in bank lending.”
Banks are flush with liquidity, but companies aren’t in the mood to borrow for expansion when order books are shrinking. Households, meanwhile, are paying down debt rather than taking fresh home or vehicle loans. It’s textbook risk-aversion.
The Rupee’s Quiet Cry for Help
The Indian rupee briefly crossed 90 to the dollar this week—the kind of psychological level that makes importers panic and exporters quietly celebrate. It pared some losses after the rate cut, but the trend is clear: capital inflows have slowed dramatically since the tariff news hit.
Foreign investors pulled roughly $9 billion from Indian equities in October-November. That’s the fastest two-month outflow since the sharpest since the COVID panic. When portfolio money leaves this quickly, the currency feels it.
So What Does the RBI Actually Achieve With This Cut?
In the short term, not as much as people hope. A 25 bps cut sounds big in headlines, but the transmission to actual lending rates is slow—often six to nine months. Mortgage rates might come down 10-15 bps if banks play along, which they frequently don’t when they’re nervous.
What the cut does do is send a powerful signal: the central bank is now officially in “growth support” mode rather than “inflation fighting” mode. That alone can change sentiment.
- Companies sitting on cash piles may finally green-light delayed projects
- Bond yields have already dropped 8-10 bps in anticipation—cheaper government borrowing
- Real-estate developers (already struggling with unsold inventory) get a lifeline
- NBFCs dependent on bank funding see their cost of money edge lower
Perhaps the most interesting aspect is what comes next. Most analysts now expect another 50-75 bps of cuts through 2025, taking the repo rate toward 4.75% or lower. That would be the most aggressive easing cycle since the pandemic.
Three Big Questions Investors Should Ask Right Now
1. Will the government step up with a fiscal package?
The RBI can cut rates all day, but if public capex slows (as some fear because of lower tax collections), the impact is muted. Watch the February budget like a hawk.
2. Can consumption really bounce back?
Urban unemployment is creeping higher, and rural wage growth has stalled. Rate cuts help at the margin, but they don’t put money directly into pockets.
3. How much more pain from global trade?
If U.S. tariffs stay or worsen under the new administration, India will need to pivot fast to Europe, ASEAN, and the Middle East. That pivot takes time and political capital.
I’ve been covering emerging markets for over a decade, and I can tell you this: when an 8%+ growth economy starts flashing these kinds of warning lights, smart money pays attention.
The RBI just lit a flare. Whether it becomes a bonfire or gets extinguished by better data in the coming quarters is the $4 trillion question.
Either way, 2025 is shaping up to be far more interesting—and volatile—than anyone expected just a few months ago.
