RBI PAUSE LIKELY AS TRADE, TARIFF RISKS CLOUD GROWTH

Global uncertainties have escalated, complicating the Reserve Bank of India's (RBI's) monetary policy decision.

- RAJANI SINHA

Even with inflation muted, there is no respite for the central bank, as growth outlook has been dampened by US tariffs. What further complicates the matter is the uncertainty around US trade policy and the likelihood of a trade deal. India’s domestic demand indicators have been improving, and policy support in the form of GST rate cut will further boost domestic demand. In these uncertain times, the central bank should adopt a wait and watch policy to get further clarity on growth outlook.

With a 50% duty imposed by the US, India has become one of the highest tariffed nations. Exports to the US constitute only around 2% of India’s GDP. Nevertheless, with this high tariff, India’s exports will feel a big blow. The annual impact of the 50% tariff could be as high as 0.8-1% of GDP.

While goods exports were already reeling under tariff pressure, the recent announcement by US of higher H-1B visa fees and the proposed HIRE Act (Halting International Relocation of Employment), which seeks to curb outsourcing by US companies, could cast a shadow on services exports too. India is in the midst of negotiating a trade deal with the US, and that could result in tariffs being reduced. However, so far there is no further clarity on this and uncertainty continues to linger.