Following our initial update on the US decision to impose reciprocal tariffs in India & ASEAN-6 markets: Sharp jump in tariff rates in view, markets are gradually coming around the view that higher tariffs on the region will be onerous on the US outlook as well. Tariff rates imposed on India are less than most Asean-6 peers, with sectoral carve outs/ exemptions especially on key pharma products, besides selected electronics etc, provide temporary relief. That said, exemptions add to ~a tenth of the total exports to the US, with other sectors still exposed to higher tariffs. To gauge the impact on growth, our framework marries export elasticities and bilateral trade/ sector flows, signaling about 0.3-0.4% of GDP downside risk for India. Authorities have steered clearly off 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.
The RBI monetary policy committee will announce its rate decision next week. Poonam Gupta, current head of NCAER has been named as the new RBI Deputy Governor and will join the upcoming rate review. Domestic data has aligned to make way for the Monetary Policy Committee (MPC) to lower rates further, characterised by easing inflation and growth whilst depreciation pressure on the rupee has eased significantly. January-February inflation combined with our early estimate for March, point to a 40-50bp undershoot in the actual vs RBI’s quarterly forecast (Policy pivot as inflation ebbs, eye on global risks). Our trimmed inflation measures stayed flat, reflecting benign conditions. Encouragingly, more than 67% of the inflation basket rose by less than 4% yoy at the start of 2025, with only a small pocket above the mid-point of the target range. Deceleration in vegetable prices is likely to hit a hurdle in CY-2Q25, heading into the summer months as the national meteorological agency has cautioned over high temperatures and drier months. While inflation readings might head back towards 4%, we don’t expect a marked departure from the target. Growth, meanwhile, is seen around 6.4-6.5% in FY25 and FY26, down from the 8% run rate in the previous two years.
The rupee was the regional outperformer, rallying 2.3% in the past month, as seasonality and dollar weakness coincided. Barring a kneejerk weak spell on Thursday on the back of reciprocal tariffs, the rupee remained in 85.0 handle against the dollar, benefited from a resumption in foreign inflows into the equity as well as debt markets, helped also by a likely current account surplus in CY-1Q25. A more notable shift was the authorities’ reaction function, especially tolerance for a period of rupee strength against expectations that dollar inflows might be absorbed to rebuild reserves. A stronger rupee is set against the backdrop of ongoing US-India negotiations where non-tariff barriers including currency movements are under scrutiny. Scope for further appreciation might run into resistance on any adverse tariff announcements. Bonds have gained from expectations of further rate cuts and steady purchases under the ongoing open market operations. Bond yields slipped further after the RBI surprised by announcing another INR800bn OMO for April, signaling a strong preference for surplus liquidity to aid transmission. April-June quarter is also expected to benefit from a significant RBI dividend payout, estimated to be north of INR 2trn. Open market operations were already at a four year high in FY25. We look for a 25bp cut in the repo rate to 6% and change in stance to accommodative at the April meeting, tapping into the wide real rate cushion. Policy guidance will be important as markets price in the possibility of at least two rate cuts in the coming months. While confident on domestic developments, the MPC is likely to be guarded on the uncertain global backdrop as trade distortions pose stagflationary risks to the US and raise the risk of slower global trade.
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