Will India tariff woes be Trumped by RBI response?

The US administration unveiled a minimum tariff rate of 10% on countries across the globe, big and small. From the imposed reciprocal tariff rates, Asia and Europe on the higher end of the tariff scale. In Asia, the highest rate of reciprocal tariff is on Cambodia and Vietnam. India faces reciprocal tariffs of 27% while China faces reciprocal tariffs of 34%. Indonesia and Taiwan are facing higher tariffs than India at 32%. Mexico and Canada are exempted from new tariffs, while the previously announced 25% tariff on autos is to take effect from April 3, 2025. Reciprocal tariffs to the equivalent of ~50% of combined estimated rate of tariff and non-tariff barriers faced by US exports in the respective countries have been announced. A retaliation might put the global economy in a trade war. The efforts to reach a bilateral agreement between India-USA provides hope and scope to limit the impact of these reciprocal tariffs levied on India.

Source: Reciprocal Tariffs, White House

If these tariffs were to come into effect in their existing form, starting April 9, 2025, it would be the onset of a dark hour for global growth and free trade. Although there is uncertainty around the intensity of impact on each country and sectors, there is a clear consensus that the tariff hike implications are negative for global growth. While countries on the receiving end of the tariffs will be worried about economic growth, especially export focused nations such as China, Vietnam, the USA might be in for a double whammy of tariff-led higher prices and subdued economic growth; complicating the policy making for the US Fed. The market reaction, when viewed from the movement in US treasury yields, is signalling growth worries going ahead. To prevent the USA from slipping into a recession, markets have built-in expectations of a softer monetary policy stance by the US Fed in the forthcoming policy to begin with.

The Asian and the Emerging Asian economies, in particular, would continue to face headwinds from the global developments and potential flow of capital. However, as far as the susceptibility to the USA’s fresh trade barriers through increased tariffs is a function of the contribution of exports to domestic economic growth. India’s exports to the USA as of CY24 amounted to US$ 80 billion. Additionally, the Pharma sector which has a share of about 10% in India’s exports basket to the US remains exempted from reciprocal tariffs, at least for now. Any contraction in total exports to the USA would be growth negative with analysts/economists estimating it to shave-off about 0.1-0.5% of India’s GDP growth. However, we believe that the actual impact of the reciprocal tariffs on India’s economic growth would be much more nuanced. For now, the way the world is viewing these steps is how worse off “I am compared to you” on the tariff scale – and in this regard India is better on the ‘relative disadvantage’ vis-à-vis the Asian peers which are facing much higher tariffs. Hence, the immediate impact on India is likely to be modest. In the possible forthcoming seismic shift in global trade and global growth, while India is not isolated, it is somewhat insulated given a strong consumption base supported by government infrastructure spending.

Amid these headwinds and muted impact on domestic inflation, the focus really shifts to US recession and global growth remains at risk of a negative growth shock in the ensuing quarters. This reinforces our view that the RBI monetary policy committee (MPC) when it meets on 9th Apr will remain in the fast lane. We see the MPC cut the policy rate by 25 bps with increased possibility of a change in its stance to accommodative from neutral and scope of additional ~50 bps rate cuts in the offing. While the currency aspect might kick-in were the beggar-thy-neighbour policies cascade due to the tariffs, we believe, at this juncture, the MPC would react more to domestic factors of inflation and growth. Having said that, monsoons will be key to track for timing and pace of policy action. Meanwhile, we believe the RBI will continue with its liquidity steps to keep the systemic liquidity conditions well into surplus such that cost of borrowing falls swiftly.

Tariffs are expected to be global growth negative and worse if retaliatory tariffs were to follow and the markets remain concerned around US recession. While the growth impact for India is expected to be much more nuanced, we believe that these tariff woes and concerns will be trumped by the RBI measures of easy liquidity which has aggressively brought the system liquidity into the surplus and go easy on policy stance and policy rates. RBI’s proactive approach has created a case for deeper rate cuts and in this backdrop, we continue to maintain a positive duration bias across our funds. We recommend investors to stay invested and add duration to their portfolios wherever possible subject to their risk return frameworks.

Source: RBI, Bloomberg. Data till April 3, 2025

(The author Shriram Ramanathan is CIO-Fixed Income, HSBC Mutual Fund. Views are own)