Indian economy resilient despite US tariffs, S&P upgrade reflects strong fundamentals: RBI

While the imposition of high US import tariff brought in some headwinds to the domestic macro-outlook, the developments since then have underscored the resilience of the Indian economy, the Reserve Bank has said in its monthly bulletin report for August.

An import tariff of 50% is applicable on India’s exports to the US from August 27, 2025. Its immediate impact may be sector-specific, says the RBI, given that around 45% of India’s merchandise exports to the US are exempted from the tariffs, including sectors constituting major export products, particularly smartphones and pharmaceuticals. Despite the elevated trade policy uncertainties, merchandise exports have shown resilience during April-August 2025-26, shows the data.

The central bank says the S&P sovereign rating upgrade for India was an acknowledgement of its strong macro-fundamentals. Additionally, says the report, the Q1:2025-26 GDP estimates reinforced the resilience of domestic growth drivers. Real GDP growth picked up pace, reaching a five-quarter high in Q1:2025-26, rising to 7.8% (year-on-year) from 7.4 per cent (year-on-year) in the preceding quarter. Consumption and fixed investment remained the key drivers contributing 4.7 percentage points and 2.7 percentage points, respectively.

“High frequency indicators for August show manufacturing and services activity at a decadal high. In this scenario, the growth outlook for H2 is one of optimism. Healthy corporate balance sheets and the focus on structural reforms by the government are the bright spots of the economy,” says the RBI report.

The RBI hopes the landmark GST reforms should progressively result in a sustained positive impact through significant gains in ease of doing business, lower retail prices and strengthening of consumption growth drivers. “A higher kharif sowing is expected to translate to a sustained growth momentum in the agriculture sector, while also keeping food prices under check.” 

The decisions of the GST Council in its 3rd September meeting set in motion major structural reforms in the GST regime, simplifying rates and processes. Beyond rate simplification, the reforms have also addressed challenges relating to inverted duty structure, and made processes business-friendly, particularly benefiting micro, small and medium enterprises, and startups. 

CPI headline inflation edged up in August, but remained well below the target rate for the seventh consecutive month. The RBI says the system liquidity remained in surplus, facilitating the pass through of policy rate cuts. “Indian equity markets witnessed bidirectional movements during August-September. India’s current account deficit moderated in Q1 over last year, supported by robust services exports and strong remittances receipts.”

The central bank has also acknowledged that the transmission of the front-loaded monetary policy easing measures has been robust. It is hopeful that, considering the positive factors, the economy will do better in H2. “Coupled with income tax relief for households and employment augmenting measures, the stage is set for a sustained pick-up in consumption demand in H2 and potentially for a virtuous cycle of higher investments and stronger growth impulses, overcoming persistent global uncertainties.”