India’s economic growth may slow from the 6.3% predicted in FY25–26 to 6% due to difficulties in global trade. Russian oil imports and a possible 50% U.S. tariff on Indian exports could reduce investment and devalue the rupee. Therefore, Moody’s warns that there may be capital flight, currency volatility, and decreasing foreign exchange reserves. This could occur if geopolitical tensions and trade continue.
How Will Indian Exports Survive US Tariff Pressure?
Indian exports to the United States currently account for nearly 18% of all international trade. Therefore, a 50% tariff would harm this. This may reduce the competitiveness of sectors like jewelry, auto parts, textiles, and pharmaceuticals. Furthermore, exporters may struggle to absorb costs or maintain contracts.
India’s FY25 trade surplus with the US, which was $41.18 billion, could rapidly decrease if demand declines. The rupee might depreciate as a result of pressure from fewer dollar inflows. Furthermore, this would lead to inflation and increased import prices in industries that rely on non-Russian oil and dollar-priced goods.
Some protection is provided by relying on cheap Russian crude, which currently accounts for 35–40% of oil imports. However, India’s forex reserves may be strained if the United States retaliates for these purchases with penalties or sanctions. The trade deficit would increase if the rupee declined because oil from OPEC or other sources would become more costly.
Investors Turn Cautious Amid Rupee Turbulence Signs
An increase in uncertainty might cause investors to flee, which would harm the outlook for the currency. The Reserve Bank of India might have to use its foreign exchange reserves to keep the INR stable or permit a slow decline to keep its export advantage. However, there is a risk of either reduced fiscal space or imported inflation.
Vietnam and other rivals of India may reduce their market share in the United States due to lower tariffs. Additionally, particularly for MSMEs, this change may slow export-led growth. Therefore, renegotiating trade agreements or adapting to new markets takes time and money, which delays relief.
What Will Shield Indian Exports from Global Shocks?
Strong rural demand and significant infrastructure investment may mitigate the impact of tariffs domestically. Government spending supports industries like steel and cement, and a robust monsoon can increase consumption driven by agriculture.
However, opposition to opening agriculture and dairy to U.S. imports may complicate talks. Protracted negotiations may delay resolution, increase the impact of tariffs, and maintain pressure on exporters. Furthermore, the short-term weakness in demand may be offset by the RBI’s policy easing.
Growth Outlook Slips as External Pressures Build Up
India’s economy is still essentially robust, but there are significant risks associated with the changing global environment. Increased import costs and pressure on Indian exports are the causes of the projected 0.3-point GDP cut.
Additionally, a slower economic outlook for FY25–26 in India is a result of decreased interest from foreign investors. In the upcoming weeks, strategic trade negotiations with the US could lessen the harm. Therefore, India needs to improve policy-based risk management and diversification if tariffs continue and oil penalties rise.
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