Key Points
US tariffs may disrupt $2B exports but minimal GDP impact
Global trade tensions risk FPI volatility and rupee pressure
RBI may cut rates 25-50 bps in FY26 amid inflation easing
Rupee depreciation bias likely with USD/INR at 88-89 by FY26
However, the report added that the broader impact of global trade tensions may have more significant consequences through indirect channels such as weaker exports, lower investment and consumption sentiment, and pressure on capital flows and the currency.
It said "India's direct export loss due to such tariffs could be limited to around 0.1 per cent of GDP".
However, the report highlighted that some trade disruptions may happen because of the reciprocal tariffs from the US.
But the overall direct impact on India's GDP is expected to be minimal. The real concern, however, is the possibility of a larger global trade war, which could create uncertainty in international markets and affect India's economy through multiple channels.
One of the key risks identified is the potential volatility in foreign portfolio investment (FPI) flows. With growing global uncertainties, FPI flows into India are likely to fluctuate, which may put additional pressure on the Indian rupee.
The report projects that the Indian rupee to trade with a depreciation bias and expects the USD/INR exchange rate to be around 88-89 by the end of the financial year 2025-26 (FY26).
On the monetary policy front, the report anticipated that the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) could reduce the policy interest rate by 25-50 basis points in FY26. This expected rate cut is based on moderating inflation and the need to support economic growth.
However, the RBI is also likely to take global economic trends into account before making any policy decisions.
The report further noted that the RBI has shown greater tolerance for rupee depreciation in the second half of FY25. One of the reasons for this is concerns over the rupee being overvalued. India's 40-currency trade-weighted real effective exchange rate (REER) had reached a record high of 108.1 in November 2024, indicating significant overvaluation.
However, following a decline in the rupee, the REER corrected to 102.4 by February 2025, suggesting that the currency was no longer overvalued when compared to its five-year average of around 104.
While India's direct export loss from US tariffs is expected to be limited, the broader impact of global trade tensions remains uncertain. Policymakers will need to monitor external risks carefully and take necessary steps to protect India's economic stability.
