External risks

Trade and capital flows will affect growth

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There is hope one day and confusion the next. As the July 9 deadline approaches, it is difficult to say with certainty whether India and the United States (US) will be able to reach a mutually beneficial bilateral-trade agreement in time. The policy approach adopted by the US has not only disrupted the global trade order, but there has also been a significant upheaval in global financial markets. The dollar, for instance, has lost over 10 per cent against a basket of currencies in the first half of 2025. Besides US trade policies, geopolitical tensions have increased external risks.

The increased level of risk and uncertainty was also reflected in the analysis of the latest bi-annual Financial Stability Report (FSR) of the Reserve Bank of India (RBI), released on Monday. As the FSR noted, increasing trade disruption and intensifying geopolitical hostilities can negatively affect the domestic growth outlook. It can also result in increased risk aversion among investors and further corrections in domestic equity markets.