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Informist, Thursday, Aug. 28, 2025

NEW DELHI – While benign financial conditions, ongoing transmission of rate cuts, supportive fiscal measures, and rising household optimism are conducive to holding up aggregate demand in the economy, persisting uncertainties related to India-US trade policies continue to pose a downside risk, the Reserve Bank of India's staff said Thursday.

"Uncertainty surrounding the India-US trade deal persists," the central bank's staff said in the Monthly Bulletin for August. "While the current exemptions from tariffs alleviate the immediate impact, exports in some sectors may get negatively impacted," the staff said in the State of the Economy chapter. The article has been written by the staff under the guidance of the Deputy Governor Poonam Gupta and does not reflect the views of the central bank. 

These comments come a day after the additional US tariffs of 25% on Indian goods took effect. The US imposed an additional 25% levy on Indian goods on Wednesday, bringing the total tariff on Indian goods to 50%. The US tariff will affect nearly 55% of exports to the US, worth almost $50 billion, from labour-intensive sectors such as chemicals and fertilisers, textiles and apparel, gem and jewellery, shrimp and seafood, furniture and beddings, and machinery and mechanical appliances, among others. 

In 2024-25 (Apr-Mar), India exported $86.51 billion worth of goods to the US and had a trade surplus of $40.82 billion. The higher tariffs will mean that Indian exports will face a pricing disadvantage of 30–35%, rendering them less competitive compared with competitors from China, Vietnam, Cambodia, the Philippines, and other Southeast and South Asian countries. 

Exporters saw the proposed trade deal with the US as an insulation against the reciprocal tariffs, but New Delhi and Washington are yet to iron out their differences over the US' demand to get access to India's politically and socially sensitive farm and dairy sector. India has always maintained a protective stance on its farm and dairy sector, but the US wants to push genetically modified crops and dairy products into India under the deal. New Delhi is unwilling to yield to these demands. If sustained, the 50% tariff could hurt India's growth by nearly half a percentage point. 
 

Irrespective of the downside risk, the central bank's staff noted that the Indian economy remained resilient amid global uncertainties. The RBI has projected the GDP growth of 6.5% in FY26. After cuts of 100 basis points between February and June, the RBI's rate-setting panel unanimously voted to keep the benchmark rate unchanged at 5.50% at its August meeting to support growth. Although the external environment has since turned bleak for India, with the 25% tariff kicking in from Aug. 7 and another 25% taking effect from Wednesday. 

"Monetary policy, going forward, would continue to maintain a close vigil on the incoming data and the evolving domestic growth-inflation dynamics to chart out the appropriate monetary policy path," the central bank staff said. They also noted that favourable rainfall and temperature conditions bode well for the kharif agriculture season, with an increase in real rural wages likely to support rural demand in the second half of the financial year.  

FINANCIAL CONDITIONS

Interestingly, the central bank's staff termed financial conditions as "benign" in Jul. 1-Aug. 21, with heavy liquidity surplus in the financial system largely managed through variable rate reverse repo operations. This led to the weighted average call rate averaging only 6 basis points below the policy repo rate of 5.50% in Jul. 16-Aug. 14 period, from 19 bps below the repo rate on average between Jun. 16 and Jul. 21.

The secured overnight rupee rate, the newly introduced benchmark for the collateralised money markets--triparty and market repo--largely moved in tandem with the uncollateralised call money rate, the staff also said. This is significant as an internal RBI working group recommended continuing with the weighted average call rate as the operating target of monetary policy as it is also reflective of broader financial market conditions.

As for government bond yields, RBI staff explained the rise between mid-July and early August was due to uncertainties on India-US trade negotiations and decreasing hopes of monetary policy easing. The MPC's Aug. 6 rate decision of a unanimous pause on the repo rate at 5.50% after 100 bps of rate cuts in Feb-Jun led the market to expect the rate-setting panel was done with rate cuts. The paper acknowledged the rise in yields in the third week of August without a comment. The yield on the 10-year benchmark 6.33%, 2035 gilt rose 13 bps in the week ended Aug. 22, largely due to fiscal concern from the Centre's proposed reforms in goods and services tax, bond dealers said.

Between the periods of a rise in the 10-year yield, the paper noted the sharp fall in the benchmark gilt yield on Aug. 14. The bond had its best day since Apr. 2 after S&P Global Ratings upped India's long-term sovereign credit rating by a notch to 'BBB'. S&P upgraded India's rating on Aug. 14, citing the economy's resilience and sustained fiscal consolidation. The ratings agency had raised its outlook on India's rating to 'positive' from 'stable' in May last year. The outlook now becomes 'stable' after the rating upgrade. "India's sovereign rating upgrade by S&P bodes well for capital inflows and sovereign yields, going forward," the paper said.  End

Reported by Priyasmita Dutta

With inputs from Aaryan Khanna

Edited by Akul Nishant Akhoury

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