The Reserve Bank of India (RBI) has stated that persisting uncertainties related to India–United States trade policies continue to pose downside risks to the domestic economy. The central bank, in its recent State of the Economy report, indicated that the inflation perspective in the short run has been better than expected earlier, but that trade-related pressures continue to be a major pressure on aggregate demand.
However, despite these outside factors, the RBI continued to project an increase of 6.5% in this financial year, as per the forecast outlined in its August policy review.. The central bank added that global risks, highlighted by the International Monetary Fund (IMF), remain skewed to the downside despite recent upward revisions in growth projections.
Favourable monsoon conditions and rising real rural wages are expected to provide support to rural demand in the second half of the year. These, along with the favorable financial environment and policy facilitation, would likely be useful in sustaining aggregate demand within the domestic economy.
The tariff issue between the United States and India has proved to be a serious problem. The U.S. has placed tariffs of up to 50 percent on Indian products, which has created questions regarding the competitiveness of Indian exports. The RBI report pointed out that such actions directly influence the flow of trade and indirectly influence the industrial activity and employment.
Industrial output has remained subdued, with mining and certain segments of manufacturing facing headwinds. While services and select manufacturing sectors continued to expand, the report indicated that uncertainty over trade policies is weighing on investment sentiment. Domestic equity markets have also reflected these concerns, registering volatility in recent months.
The central bank highlighted the fact that tariffs can also strain the corporate value that is increasingly linked to intangible assets like intellectual property and brand recognition.These resources are not directly taxed but are expressed in the prices of the goods exported, and they may be less competitive in foreign markets.
On the inflation front, the RBI reported a better trend than expected. Headline inflation has fallen in nine straight months, with food price pressures remaining muted and base effects promoting this. The central bank estimated that inflation will be below the 4% threshold during the second quarter and will increase gradually towards the end of the financial year.
According to the report, financial conditions are still favorable to growth, and the low rates, fiscal stimulus, and household optimism are also supportive. However, the RBI emphasized that close attention was required, as the world and trade-related uncertainties might disequilibrate the domestic growth-inflation mix during the next few quarters.
Although India's macroeconomic fundamentals are stable the RBI emphasized that external headwinds, such as trade disputes and tariffs may need close attention. The central bank renewed its efforts to closely monitor the changing data to inform monetary policy in accordance with the goals of growth and price stability.