Global Macro Research
Global Macro ResearchNew US tariffs will test the RBI's neutral stance
India faces higher-than-expected US tariffs, but we expect the economic fallout to be contained. Indeed, an eventual compromise, which should allow activity to recover and reduce the need for further monetary easing, is still likely. However, the risks of further rate cuts by the Reserve Bank of India are significantly higher.
Author
Michael Langham
Emerging Markets Economist
ระยะเวลา: 1 นาที
วันที่: 16 ก.ย. 2568
Key Takeaways
- India now faces a cumulative 50% tariff on exports to the US, a 25% baseline plus an additional 25% penalty for Russian oil purchases.
- Despite sectoral exemptions, India’s trade-weighted tariff rate rises to 35%, undermining its appeal as a supply-chain relocation hub compared to regional peers.
- Prime Minister Modi is unlikely to concede to US pressure in the near term given India’s low economic exposure (2.3% of GDP) to US goods demand.
- Still, we expect a trade détente, with ‘face saving’ compromises, before year-end, leaving India with an effective tariff rate close to around 20%.
- Assuming a trade compromise and factoring in fiscal support measures, we forecast real GDP growth of 6.8% in the fiscal year (FY) 2025/2026, but risks are to the downside.
- In our view, this is unlikely to be enough to convince the RBI to resume its rate cutting cycle this year, but risks of further rate cuts are elevated.
If trade negotiations fail to reduce the tariff rate and the growth drag becomes more pronounced, then we would expect the RBI to deliver a further 50bps of rate cuts in December to support the economy.
