Tariff war may shave 20 bps off GDP as it will hit exports: RBI Governor

MUMBAI: Worried over the impact of the worsening tariff war on growth, the Reserve Bank of India’s rate-setting body Monetary Policy Committee has lowered its growth projection by 20 bps to 6.5% this fiscal. This fear had the panel unanimously changing the policy stance to accommodative from neutral — meaning easy money days are ahead for the economy — and cutting the key policy rate by 25 bps to 6% with immediate effect.

The panel also has a benign inflation outlook for the year and expects retail prices to average 4% or even below this fiscal.

Addressing the media after the policy announcement, governor Sanjay Malhotra highlighted multiple areas of concern—from investments and consumption, to domestic growth and to exports as well as the impact of the tariff war on inflation which he believes should not be a big problem unless the rupee falls too sharply, else falling prices of commodities, especially crude, should cushion it.

“The recent trade tariff-related measures have exacerbated the uncertainties clouding the economic outlook across regions, posing new headwinds for global growth and inflation. Though our share of exports in GDP is only 12%, of which the share from shipping to the US is only 2%, being the largest export destination, the tariff war can impact our exports, which in turn can affect the GDP by 20 bps this fiscal,” the governor told reporters here Wednesday.

“I am more worried about the impact of the trade war on growth than inflation, which has improved decisively over the past few months,” he added.

“The uncertainties facing the global economy due to US reciprocal tariffs will have a negative impact on our exports as well as domestic growth," Malhotra added.

On the positive side from this turbulence, he noted that the dollar has weakened appreciably; bond yields have softened significantly; equity markets are correcting; and crude prices have fallen to their lowest in over three years. Under these circumstances, central banks are navigating cautiously, with signs of policy divergence across jurisdictions, reflecting their own domestic priorities,” he said, adding, “our policy responses will not be guided by what other central banks are doing but purely on the domestic factors.”

Highlighting several areas of concern, he said, “First and foremost, uncertainty in itself dampens growth by affecting investment and spending decisions of businesses and households. Second, the dent on global growth due to trade frictions will impede domestic growth. Thirdly, higher tariffs shall have a negative impact on net exports.”

“There are, however, several known unknowns - the impact of relative tariffs, the elasticities of our export and import demand; and the policy measures adopted by the government including the proposed trade agreement with the US. These make the quantification of the adverse impact difficult,” he said.

While forecasting for a sub-4% average inflation this fiscal, the governor pointed out that the risks posed by higher tariffs will be two-sided. “On the upside, uncertainties may lead to possible currency pressures and imported inflation. On the downside, slowdown in global growth could entail further softening in commodity and crude prices, putting downward pressure on inflation. Overall, while global trade and policy uncertainties shall impede growth, its impact on domestic inflation, while requiring us to be vigilant, is not expected to be of high concern,” the governor said.

In 2024, India's main exports to the US included drug formulations and biologicals ($8.1 billion), telecom equipment/instruments ($6.5 billion), precious and semi-precious stones ($5.3 billion), petroleum products ($4.1 billion), gold and other precious metal jewellery ($3.2 billion), ready-mades of cotton, including accessories ($2.8 billion), and steel and aluminium ($2.7 billion).

Imports from the US included crude oil ($4.5 billion), petroleum products ($3.6 billion), coal, coke ($3.4 billion), cut and polished diamonds ($2.6 billion), electric machinery ($1.4 billion), aircraft, spacecraft & parts ($1.3 billion), and gold ($1.3 billion). The bilateral trade is heavily in favour of us with a surplus of around $46 billion.

Meanwhile, lowering its inflation forecast, the MPC said it sees retail inflation in the current fiscal averaging at 4%, down from 4.2 per cent earlier, taking into account good agricultural output and falling crude prices.

Retail inflation declined by a cumulative 1.6 percentage points during January-February, from 5.2% in December 2024 to a low of 3.6% in February.

"On the inflation front, while the sharper-than-expected decline in food inflation has given us comfort and confidence, we remain vigilant to the possible risks from global uncertainties and weather disturbances," he said.

Taking all the uncertainties into consideration, and assuming a normal monsoon, Malhotra said retail inflation is projected at 4%, with Q1 at 3.6%; Q2 at 3.9%; Q3 at 3.8%; and Q4 at 4.4%, with risks evenly balanced, he said.