Persistent US Inflation and Weaker Rupee May Lead to a Less-Than-Ideal RBI Rate Cut Cycle

The higher-than-expected U.S. inflation figures for January, coupled with growing concerns over trade tariffs, may pose challenges to the Federal Reserve’s rate-cut cycle. This, in turn, could impact the Reserve Bank of India (RBI), according to experts cited by Moneycontrol.

Unexpected U.S. Inflation Surge

The latest data released on February 12 revealed that U.S. inflation climbed to 3% in January, marking the highest monthly increase in two years. This figure exceeded the projected estimate of 2.9%, raising concerns about the Federal Reserve’s ability to proceed with its anticipated rate cuts in 2025.

Madhavi Arora, chief economist at Emkay Global, described the inflation reading as “uncomfortable” for the Fed, despite some seasonal factors influencing the increase. “It is reminiscent of early 2024 when inflation remained stubbornly high for months before gradually easing. With additional tariff threats now looming, the Fed’s options will become even more limited as the year progresses,” she explained.

Although inflation has come down from the approximately 5% recorded in 2023, it remains above the Fed’s 2% target, reinforcing expectations that rate cuts may be delayed.

Tariffs Could Keep Inflation Elevated

Economists suggest that tariffs will contribute to prolonged inflationary pressures.

“The U.S. CPI has struggled to reach the Fed’s 2% target for quite some time. Factoring in the impact of tariffs, inflation is likely to remain sticky,” noted Paras Jasrai, senior analyst at India Ratings and Research.

Since assuming office in late January, President Donald Trump has implemented tariffs on China, Canada, and Mexico. Additionally, he has raised tariffs on steel and aluminum imports to 25% and has signaled potential retaliatory tariffs on other nations, including India.

During Prime Minister Narendra Modi’s recent U.S. visit, Trump expressed willingness to engage in trade negotiations but reiterated his stance that India remains a “very hard” country for businesses due to its high tariffs.

Impact on the Indian Economy and RBI’s Policy Approach

In contrast to the U.S., India’s inflation eased to a five-month low of 4.31% in January, providing some relief to policymakers. However, concerns persist regarding the impact of a weakening rupee and potential imported inflation.

Experts argue that these factors will likely make the RBI more cautious in its monetary policy decisions.

“All this, along with the weaker rupee and its cascading effect on imported inflation, would make the RBI more careful about any further rate cuts,” said Jasrai.

Despite cutting the repo rate for the first time in five years—from 6.5% to 6.25%—the RBI maintained a “neutral” stance, signaling its readiness to respond to future inflationary threats.

Rupee Depreciation and Its Consequences

The Indian rupee has depreciated by 1.5% since the beginning of 2025. A weaker rupee generally makes imports more expensive, raising the cost of essential commodities such as crude oil and raw materials. This can contribute to inflationary pressures, further complicating the RBI’s policy decisions.

Dhiraj Nim, FX strategist at ANZ, pointed out that exchange rate movements could limit the extent of monetary support that central banks provide to emerging markets. “The rate-cutting cycle might not be as optimal as the economy requires,” he stated.

The combination of persistently high U.S. inflation, escalating trade tensions, and rupee depreciation presents challenges for both the Federal Reserve and the RBI. While India’s inflation has moderated, external factors such as tariffs and currency fluctuations could disrupt economic stability.

Going forward, the RBI will likely proceed with caution, carefully assessing inflation trends, global economic conditions, and exchange rate movements before making further policy adjustments. Meanwhile, the Federal Reserve faces mounting pressure to balance inflation control with economic growth, potentially delaying its rate-cutting plans for the foreseeable future.