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A recent report indicates that India’s direct export loss due to US tariffs is projected to remain limited, at approximately 0.1% of the nation’s GDP. However, the report cautions that reciprocal tariffs from the US could cause some trade disruptions.
A report by CareEdge Ratings reveals India’s direct export losses from US tariffs are a mere 0.1% of GDP. Good news, right? Not entirely.
Despite this, the overall direct impact on India’s GDP is expected to be minimal. The primary concern lies in the potential for a larger global trade war, which could create significant uncertainty in international markets and adversely affect India’s economy through various channels.
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.
Foreign Investment and Rupee Volatility
One key risk identified is the potential volatility in foreign portfolio investment (FPI) flows. With escalating global uncertainties, FPI flows into India are likely to fluctuate, potentially placing additional pressure on the Indian rupee. The report forecasts the Indian rupee to trade with a depreciation bias, with the USD/INR exchange rate projected to reach 88-89 by the end of the financial year 2025-26 (FY26).
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. Rupee depreciation brought the REER to 102.4 by February 2025, eliminating the overvaluation against the five-year average of 104.
Looking Ahead: Monitoring External Risks
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 diligently monitor external risks and implement necessary measures to safeguard India’s economic stability.
(With Inputs From ANI)
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