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Journalism of Courage
Reserve Bank of India Governor Sanjay Malhotra on Wednesday warned that global trade uncertainties, fuelled by US President Donald Trump’s tariffs, will likely impede India’s economic growth and negatively impact net exports.
The recent trade tariff related measures have exacerbated uncertainties clouding the economic outlook across regions, posing new headwinds for global growth and inflation, Malhotra said. However, its impact on domestic inflation, while requiring India to be vigilant, is not expected to be of high 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,” Malhotra said while unveiling the monetary policy review.
Stating that headwinds from global trade disruptions continue to pose downward risks, the Monetary Policy Committee (MPC), which slashed the repo rate by 25 basis points to 6 per cent on Wednesday, has cut the growth estimate to 6.5 per cent for 2025-26 from 6.7 per cent projected earlier.
“The global economic outlook is fast changing,” Malhotra said on the uncertainties.
Malhotra said higher tariffs will 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 Foreign Trade Agreement with the USA, to name a few. These make the quantification of the impact difficult,” he said.
The risks to inflation, on the other hand, are two sided, he said. “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 oil prices, putting downward pressure on inflation,” RBI Governor said.
He said the global economy is going through a period of exceptional uncertainties. “The difficulty to extract signal from a noisy and uncertain environment poses challenges for policy making. Nevertheless, monetary policy can play a vital anchoring role in ensuring that the economy remains on an even keel,” he said.
Amidst this turbulence, the US dollar has weakened appreciably, bond yields have softened significantly, equity markets are correcting and crude oil 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.
“In our context, the domestic growth-inflation trajectory demands monetary policy to be growth supportive, while being watchful on the inflation front. We are aiming for a non-inflationary growth that is built on the foundations of an improved demand and supply response and sustained macroeconomic balance,” Malhotra said.
“As before, we shall remain agile and decisive in our response and put in place policies that are clear, consistent, credible and in the best interest of the economy,” he said.
He said investment activity has gained traction and it is expected to improve further on the back of sustained higher capacity utilisation, the government’s continued thrust on infrastructure spending, healthy balance sheets of banks and corporates, along with the easing of financial conditions. “Merchandise exports will be weighed down by global uncertainties, while services exports are expected to remain resilient. Headwinds from global trade disruptions continue to pose downward risks,” he said.
