Reserve Bank of India (RBI) Governor Sanjay Malhotra warned on Wednesday that the prospects of external demand remain “uncertain” amid the ongoing tariff announcements and trade negotiations, although there were “opportunities… for the taking” in the medium-term as the world order changed.
While announcing the Monetary Policy Committee’s (MPC) decision to leave the policy repo rate at 5.5 per cent — with all six members of the rate-setting panel in favour of leaving the interest rate unchanged — Malhotra said the Indian economy is “navigating a steady growth path with price stability” despite a “challenging” external environment.
“Over the medium-term also, the Indian economy holds bright prospects in the changing world order drawing on its inherent strength, robust fundamentals, and comfortable buffers. Opportunities are there for the taking, and we are making all efforts to create enabling conditions through a multi-pronged yet cohesive approach to policymaking,” Malhotra said, adding that the uncertainties of tariffs “are still evolving”.
Even as the RBI governor cited headwinds from prolonged geopolitical tensions, persisting global uncertainties, and volatility in global financial markets posing risks to India’s growth outlook, the RBI on Wednesday retained its GDP growth forecast for the current fiscal at 6.5 per cent, days after the International Monetary Fund (IMF) on July 29 raised its own forecast for India to 6.4 per cent for both 2025-26 and 2026-27 on account of easing global trade tensions. Malhotra echoed these views on Wednesday, saying that geopolitical uncertainties have “somewhat abated, even though global trade challenges continue to linger”.
However, US President Donald Trump sent shockwaves a day later on July 30 by slapping a 25 per cent tariff on India — along with an additional but unspecified “penalty” for its defence and energy imports from Russia — even as the two countries negotiate a bilateral trade agreement. Trump said India has “the most strenuous and obnoxious non-monetary Trade Barriers of any Country”. Since then, the US President has threatened raising the tariff on Indian goods substantially higher.
Trump doubles down on tariff threat over India’s purchase of Russian oil
“India is not only buying massive amounts of Russian Oil, they are then, for much of the Oil purchased, selling it on the Open Market for big profits. They don’t care how many people in Ukraine are being killed by the Russian War Machine. Because of this, I will be substantially raising the Tariff paid by India to the USA,” Trump posted on social platform Truth Social on Monday. A day later on Tuesday, Trump told television channel CNBC in an interview that “I think I’m going to raise that (25 per cent tariff on India) very substantially over the next 24 hours”.
In 2024, total goods trade between India and the US stood at $129.2 billion. While the US’ exports to India in the last calendar year rose 3.4 per cent from 2023 to $41.8 billion, its imports from India increased by 4.5 per cent to $87.4 billion, resulting in a goods trade deficit of $45.7 billion. India primarily exports electronics, gems and jewellery, pharma products, machinery, textiles, and refined petroleum products to the US. According to Emkay Global Financial Services, India’s exports to the US could fall by $30 billion-$33 billion at tariff levels of above 25 per cent. This estimate does not account for any cross-country responses.
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Economists caution on tariff impact to India’s GDP growth
While the RBI has not changed its growth forecast due to the 25 per cent tariff, which is effective from Thursday, economists have warned in recent days that India’s growth rate in the current fiscal could be hit by 20-40 bps and could even fall below 6 per cent because of Trump’s tariff war.
According to Christian de Guzman, senior vice president at Moody’s Ratings, while the 25 per cent tariff on India is marginally lower than the 26 per cent reciprocal rate announced in April, it is significantly above those from other major exporters in the Asia-Pacific region.
“Curtailed access to the largest economy globally diminishes prospects for India’s ambitions to develop its manufacturing sector, particularly in higher value-added sectors such as electronics. The higher tariffs relative to other countries also disadvantages India as it vies for a greater share of trade and investment flows away from China, which has been subject to even more severe tariff treatment by the US,” de Guzman said on Monday.
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