Will India’s Economy Withstand Trump’s Tariff Shock?
RBI Flags Growth Risks as US Tariffs Bite
In a bold and timely statement, RBI Governor Sanjay Malhotra has warned that India’s growth momentum could slow down in the second half of FY2025-26. The reason? A steep 50% tariff hike by the Donald Trump administration on Indian exports.
These tariffs include:
- 25% reciprocal tariffs on Indian goods
- 25% additional tariffs linked to India’s crude oil trade with Russia
While India and the US continue trade negotiations, the deadlock over crude imports and agricultural market access remains unresolved.
GST Cuts Help, But Can’t Fully Offset Tariff Impact
Governor Malhotra acknowledged that recent GST rate cuts are a step in the right direction. However, he cautioned that they won’t be enough to counter the full impact of the US tariffs.
“We’ve assumed a 50% tariff rate in our projections. The GST reforms will help, but trade headwinds remain strong,” he said during the post-policy press conference.
Revised GDP Forecasts: What’s Changing?
Despite external challenges, the RBI remains cautiously optimistic. Domestic factors like a good monsoon, lower inflation, and monetary easing are expected to support growth.
Here’s the updated GDP outlook:
| Quarter | Projected Growth |
|---|---|
| Q2 FY2025-26 | 7.0% |
| Q3 FY2025-26 | 6.4% |
| Q4 FY2025-26 | 6.2% |
| Q1 FY2026-27 | 6.4% |
Full-year FY2025-26 projection: 6.8%
Why RBI Held the Repo Rate Steady
The Monetary Policy Committee (MPC) unanimously decided to keep the repo rate unchanged at 5.5%. This marks the second consecutive pause after a 100 basis point cut earlier this year.
Malhotra explained:
- The impact of earlier policy actions is still unfolding
- Inflation has moderated, giving room to support growth
- External uncertainties, especially trade tensions, are still evolving
“We’re waiting for clarity before making further moves,” he said.
Global Headwinds vs. Domestic Strength
While global trade tensions and financial market volatility pose risks, India’s domestic economy is showing resilience. Key drivers include:
- Strong rural demand due to good rainfall
- Rising capacity utilization
- Stable employment and services sector growth
- Continued government capital expenditure
Crude Oil Trade and US Pressure
A major sticking point in India-US trade talks is India’s continued crude oil procurement from Russia. The US tariffs are partly aimed at discouraging this practice.
India, however, has drawn red lines on:
- Opening its agricultural sector to US exports
- Allowing dairy imports that could hurt local farmers
RBI’s Support Measures for Exporters
To help exporters navigate the tariff storm, RBI has introduced several relief measures:
- Extended repatriation period for foreign currency accounts
- Increased forex outlay window for merchandise trade
- Simplified compliance for small exporters and importers
These steps aim to ease liquidity and reduce paperwork, especially for small businesses.
📎 External Links for Reference
- Times of India coverage
- Business Standard report on RBI export measures
- Fortune India GDP forecast update
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