Tariffs will have negative impact on exports: RBI governor

RBI governor Sanjay Malhotra on Wednesday said the recent trade tariff related measures by the US have exacerbated uncertainties clouding the economic outlook across regions, posing new headwinds for global growth and inflation.

“Amidst this turbulence, the US dollar has weakened appreciably; bond yields have softened significantly; equity markets are correcting; and crude oil prices have fallen to their lowest in over three years. Under these circumstances, central banks are navigating cautiously, with signs of policy divergence across jurisdictions, reflecting their own domestic priorities,” Malhotra said, adding that the global economic outlook is fast changing.

“The Indian economy has made steady progress towards the goals of price stability and sustained growth. On the inflation front, while the sharper-than-expected decline in food inflation has given us comfort and confidence, we remain vigilant to the possible risks from global uncertainties and weather disturbances. Growth is improving after a weak performance in the first half of the financial year 2024-25, although it still remains lower than what we aspire for.

Highlighting the possible implications for growth, Malhotra said the uncertainty in itself dampens growth by affecting investment and spending decisions of businesses and households. “The dent on global growth due to trade frictions will impede domestic growth… Higher tariffs shall have a negative impact on net exports. There are, however, several known unknowns - the impact of relative tariffs, the elasticities of our export and import demand; and the policy measures adopted by the Government including the proposed Foreign Trade Agreement with the USA, to name a few. These make the quantification of the adverse impact difficult,” said Malhotra.

Taking all these factors into consideration, real GDP growth for 2025-26 is now projected at 6.5%, said the RBI governor. “While the risks are evenly balanced around these baseline projections, uncertainties remain high in the wake of the recent spike in global volatility. It may be noted that the growth projection for the current year has been marked down by 20 basis points relative to our earlier assessment of 6.7% in the February policy. This downward revision essentially reflects the impact of global trade and policy uncertainties, which I had highlighted earlier,” said Malhotra.

The risks to inflation, on the other hand, are two sided, he stated. “On the upside, uncertainties may lead to possible currency pressures and imported inflation. On the downside, slowdown in global growth could entail further softening in commodity and crude oil prices, putting downward pressure on inflation. Overall, while global trade and policy uncertainties shall impede growth, its impact on domestic inflation, while requiring us to be vigilant, is not expected to be of high concern,” explained Malhotra.