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Informist, Wednesday, May 21, 2025

 

MUMBAI – Robust domestic demand and low dependence on exports keep India well positioned to deal with the negative effects of US tariffs and global trade disruptions, Moody's Ratings said in a note on Wednesday. Government measures aimed at increasing private spending, enhancing manufacturing capabilities, and boosting infrastructure investment will help tackle the bleak outlook for global demand, Moody's said. 

 

Easing inflation in India, coupled with ample liquidity in the banking system, offers the potential to cut interest rates further in order to boost the economy, Moody's said. The skirmish with Pakistan earlier this month is expected to weigh more on Pakistan's economy than India's, it said. 

 

The Centre's expenditure on infrastructure bolsters India's GDP growth, whereas reductions in personal income tax enhance spending, it said, adding that India's restricted dependence on the exchange of commodities and its strong services industry will help offset the effect of US tariffs. Products manufactured in India might even gain from heightened US demand if trade discussions result in lower tariffs on India compared to other developing markets. The US has proposed a 26% extra duty on Indian goods, likely to be effective in July. 

 

Nonetheless, a decline in worldwide economic and credit situations will produce ripple effects. The rating agency believes that even with the trade talks and shift in policy details, tariffs will remain a durable feature of the trade landscape. The US is India's top export market with a share of over 15% in India's total outbound shipments. Indian exports to the US in 2024 were worth $80.77 billion and India had a trade surplus of $36.35 billion with the US during the year, according to data from the commerce ministry.

 

The US remains the largest source of overseas remittances to India. However, the number of Indian nationals working under H1B visas is likely to be small compared to those who have secured permanent residency or US citizenship, according to Moody's. Remittance flows from permanent residents are resilient to potential changes in US immigration policy.

India is better placed to deal with the US' reciprocal traiffs compared to other south and southeast Asian peers Vietnam, Cambodia, and Thailand, Moody's said.

 

India is looking to conclude a tranche of the proposed blateral trade agreement with the US by July to safeguard Indian goods from extra tariffs. Commerce and Industry Minister Piyush Goyal recently met his US counterpart Howard Lutnick and held discussions to expedite the first tranche of the deal.

 

In a situation of the ongoing regional tensions, Moody's does not anticipate significant disruptions to India's economy activity due to its limited economic ties with Pakistan. Additionally, the regions of India that generate the majority of its agricultural and industrial production are located far from the areas of conflict. However, increased defence expenditures could potentially burden India's fiscal robustness and gradual fiscal unification, Moody's said. 

 

DOMESTIC RESILIENCE

India's financial markets have largely avoided much of the global trade-related fluctuations, primarily due to its strong domestic economy. Offshore financing represented merely a fifth of the funding to non-financial firms on average over the last 10 years, offering a shield against fluctuations in global financial markets, Moody's said.

 

Inclusion of Indian government bonds on global bond indices since 2024 provides stability to debt inflows. Nevertheless, additional decline in worldwide economic and credit conditions may spill over due to reduced global demand, resulting in stricter domestic funding conditions. This may lead to a significant risk of defaults, especially for issuers with high yields, according to the rating agency.  

 

Domestic demand also recived a significant boost from measures announced in the Union Budget. Robust infrastructure investments by the central government, along with incentives for capital expenditures by state governments and reductions in personal income taxes enhance domestic economic activity. 

 

The Reserve Bank of India's measures to boost liquidity in the banking system with a change of stance has provided room for further rate cuts in the coming months. However, exchange rate fluctuations could weigh on the pace of monetary policy easing. Lowering rates too fast could drive up capital outflows and lead to faster depreciation of the rupee, Moody's said. The RBI's repo rate currently stands at 6%. 

 

Moody's projects that government spending will continue to be significant in infrastructure areas such as highways, railways, and urban development, driven by the rising need for superior infrastructure that comes with economic expansion. The overall capital expenditure allocation of INR 11.2 trillion for 2025-26 (Apr-Mar) indicates a 10% rise compared to the revised estimate for the previous year. Moody's anticipates this increase to continue. In the last five years, funding for highways and railways has increased twofold, Moody's said. 

 

The rating agency also expects private sector involvement in these sectors to increase going forward. Moody's expects substantial investments in roads, railways and ports to significantly boost demand in related industrial sectors such as mining, steel, cement and construction. Government plans for mass-market housing and universal access to water will further drive demand for these sectors, the rating agency said. 

 

BANKING SECTOR

While a worldwide economic slowdown resulting from trade disputes would impact the asset quality of Indian banks, the nation's total merchandise trade exports as a portion of GDP is minimal. India's primary merchandise exports to the US consist of electronic devices, fabrics, precious stones and jewelry, medications, equipment and automotive components, and chemicals. The banking industry's vulnerability to these sectors constitutes just about 5% of all loans. 

 

Moody's expects the systemwide non-performing loan ratio to be 2-3% in the next 12 months, compared to 2.5% as of December. "Banks' asset quality will deteriorate moderately after substantial improvements in recent years, with some stress in unsecured retail loans, microfinance loans and small business loans," the report said. 

 

Banks' profitability will remain strong despite a slight decline in net interest margins due to interest rate reductions. Higher than anticipated domestic rate reductions to mitigate the impact of US tariffs on economic growth would heighten pressure on banks' interest margins. Non-interest income for banks is expected to be robust due to high business volumes, driven by wealth management and insurance services, along with strategic bond profits, Moody's said. 

 

With demand for loans from corporates expected to remain muted, Moody's sees systemwide loan growth slowing to 11-13% in 2025-26 from an average of 17% for 2022-2024.  End

 

US$1 = INR 85.66

 

Reported by Kabir Sharma

Edited by Avishek Dutta

 

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