DESPITE TARIFF HEAT, POLICY EASING LIKELY TO STAY ON TRACK

India's inflation may undershoot RBI forecast by 40-50 basis points

- RADHIKA RAO

Financial markets are gradually coming around to the view that higher tariffs on the region will be a burden on the outlook for the US as well. Arguably, the level of reciprocal US tariffs appears more to be driven by the trade gap between the countries rather than the tariff differential. Any retaliatory action from America's trading partners could attract higher tariffs, while conciliatory moves or concessions might presumably translate to relief.

Tariff rates imposed on India are less than those of most Asean-6 peers, with sectoral carve-outs and exemptions providing temporary relief. That said, exemptions add to a little more than a tenth of the total exports to the US, with other sectors still exposed to higher tariffs. Our growth impact framework marries export elasticities and bilateral trade/sector flows, signaling about 0.3-0.4% of GDP modest downside risk for India.

India has steered clear of retaliatory action, instead counting on a successful conclusion of the ongoing bilateral trade agreement with the US next quarter to lower the effective tariff rate on India's exports to the US.