US Tariffs on India: RBI’s Warning & 2025 GDP Impact Explained

Mike Anndy

1 month ago

India’s economy has entered a turbulent phase in 2025 with US tariffs on India. Global headlines are dominated by U.S. President Donald Trump’s threat to raise tariffs on Indian goods even beyond the current 25%. These trade tensions have sparked uncertainty for investors, businesses, and policymakers alike. The Reserve Bank of India (RBI), responding at its August Monetary Policy Committee (MPC) meeting, took a cautious stance, holding the key policy rates steady but warning that the evolving tariff environment and global uncertainty could pose risks to India’s growth projections.

In this comprehensive analysis, we break down:

What the tariff threats mean for India’s economy.
How the RBI evaluates these risks.
The likely impact on GDP, inflation, and sectors.
What you should watch for as these global headwinds evolve.

Table of Contents

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What’s Happening: US Tariff Threats

President Trump has issued stern warnings of escalating tariffs on India, citing India’s Russian crude oil imports and “unfair trade practices.” He asserted that tariffs could be raised substantially “within the next 24 hours.” This comes as Indian exports to the US, including key sectors like textiles, pharmaceuticals, auto parts, and IT services, face renewed risks of higher duties and compliance hurdles.

“India has not been a good trading partner because they do a lot of business with us, but we don’t do business with them. So we settled on 25% but I think I’m going to raise that very substantially… because they’re buying Russian oil.”
— Donald Trump (August 2025)

The immediate implications? Heightened trade tensions, export uncertainty, and concerns about the resilience of India’s economic growth trajectory.

RBI’s Policy Response: No Rate Change, Caution Signals

The RBI, led by Governor Sanjay Malhotra, maintained its repo rate steady at 5.5%—signaling a “neutral stance” amidst these global uncertainties. Here’s why:

Risks from Tariffs: The RBI acknowledged that “prospects of external demand remain uncertain amidst ongoing tariff announcements and trade negotiations.”
GDP Growth Maintained: Despite tariff threats, the RBI kept its GDP growth forecast at 6.5% for 2025–26 (quarterly: 6.5%, 6.7%, 6.6%, 6.3%).
Inflation Under Watch: With headline inflation lower than anticipated (mainly due to falling food prices), the central bank paused further rate cuts but warned that “inflation is projected to go up from the last quarter of this financial year.”

“Growth is robust and as per earlier projections though below our aspirations. The uncertainties of tariffs are still evolving. Monetary policy transmission is continuing.”
— RBI Governor Sanjay Malhotra

Key Takeaways from RBI Governor’s Policy Speech

Tariff Threats Create Uncertainty: Governor Malhotra stressed the “very difficult” nature of predicting exactly how US tariffs will impact GDP. The RBI’s forecast already factors in some global uncertainty, but “there is still a lot of uncertainty… it’s really very difficult to predict as to what the impact will be.”
Balanced Approach: While keeping rates steady, RBI promised to maintain a vigilant data-driven stance and adapt as more evidence emerges on the tariff impact.
Supportive Fiscal & Regulatory Environment: The RBI underscored the role of government capital expenditure, strong domestic demand, and a resilient services sector in helping offset external shocks.

Detailed Quarterly GDP Projections (2025–26)

Quarter	Projected GDP Growth (%)
Q1 2025–26	6.5%
Q2 2025–26	6.7%
Q3 2025–26	6.6%
Q4 2025–26	6.3%
Q1 2026–27	6.6%

How Might US Tariffs Impact India?

1. Exports & Trade Balances

Higher US tariffs threaten Indian export competitiveness in major industries (textiles, pharma, steel, IT).
Export growth could slow if US market access weakens, impacting current account balances and potentially the rupee.

2. Investment & Sentiment

Ongoing trade disputes and global uncertainty can dent investor confidence, weaken FDI flows, and increase market volatility.
Businesses may delay expansions or new investments, affecting job creation, especially in export-linked sectors.

3. Inflation & Input Costs

If tariffs hit supply chains, input costs could rise for manufacturers reliant on US-origin parts or global trade channels.
However, lower core inflation offers RBI some policy space for now.

4. Sectoral Winners & Losers

Winners: Sectors less dependent on direct US exports, or those with strong domestic demand, may remain resilient (e.g., construction, core services partly insulated).
Losers: Export-heavy sectors (textiles, pharma, IT), SME exporters, and those exposed to US-linked supply chains could see near-term stress.

RBI’s Stance and India’s Growth Prospects:

1. Will US Tariffs Stall India’s GDP Growth?

RBI’s 6.5% growth forecast for 2025–26 already incorporates some impact from global risks, including US tariffs. However, “it’s really very difficult to predict” the full outcome, and the central bank is keeping a close watch for emerging data on export, manufacturing, and investment trends.

2. Could RBI Cut Rates Further?

RBI kept policy rates steady, noting that recent 100bps rate cuts continue to support liquidity and borrowing. Additional rate cuts would depend on how inflation and growth unfold, especially if trade-driven shocks intensify.

3. What Should Businesses and Investors Do?

Monitor RBI guidance and macroeconomic indicators closely.
Hedge exposure to vulnerable export sectors.
Diversify markets and supply chains to mitigate US risk.
Focus on domestic demand opportunities supported by government spending.

FAQs:

Q1. Why are US tariffs on India so significant in 2025?
A1. The US is a top market for Indian exports. Higher tariffs can dent competitiveness, harm sectoral jobs, and create currency and investment risks.

Q2. Has India responded to the US tariff threats?
A2. India continues to engage in trade negotiations, aiming for an “amicable solution” as per RBI Governor’s comments. No formal retaliatory action announced as of August 2025.

Q3. How does RBI weigh tariff risks in its forecasts?
A3. RBI says its 6.5% GDP growth forecast for 2025–26 factors in global uncertainty, but cautions that trade tensions may evolve and will be monitored closely.

Q4. Are domestic reforms helping insulate India?
A4. Strong government spending, stable inflation, and a buoyant services sector help cushion the blow, though major export-reliant industries may be exposed.

Q5. What is the outlook for interest rates and inflation?
A5. RBI held rates steady for now. If inflation spikes due to supply shocks or tariffs, further cuts are unlikely; stable food prices are helping for now.

Latest Updates & 2025 Trends:

Trade tension remains the leading risk for India’s economic outlook in H2 2025.
RBI’s next major policy meeting: September 29–October 1, 2025.
Analysts and policymakers advise vigilance and flexibility as new data comes in.

US tariff threats inject significant uncertainty into India’s economic outlook. The RBI’s neutral monetary policy and steady growth projections reflect confidence in domestic fundamentals—but policymakers, investors, and businesses alike should remain vigilant. Further policy changes and market moves will depend on how global trade, inflation, and negotiations evolve in the months ahead.

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