It’s not about Trump shaking India’s trade, but what comes next

India’s direct export loss due to tariffs imposed by US President Donald Trump is expected to be minimal, accounting for only 0.1% of the country’s GDP, according to a report by CareEdge Ratings. However, the broader impact of global trade tensions could create economic challenges.

While the direct impact on GDP is limited, the report warns that uncertainty in global markets may affect India’s economy through weaker exports, reduced investment sentiment, and increased pressure on capital flows and the currency. "India's direct export loss due to such tariffs could be limited to around 0.1 per cent of GDP," the report stated.

The real concern is what comes next. One of the key risks is the potential volatility in foreign portfolio investment (FPI) flows. With rising global uncertainties, FPI inflows to India may fluctuate, adding pressure on the Indian rupee. The report forecasts the rupee to trade with a depreciation bias, projecting the USD/INR exchange rate at 88-89 by the end of the financial year 2025-26 (FY26).


On the monetary policy front, the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) may reduce the policy interest rate by 25-50 basis points in FY26. This potential rate cut is linked to moderating inflation and the need to support economic growth. However, the RBI is expected to assess global economic trends before making any decisions.

The report also noted that the RBI has shown greater tolerance for rupee depreciation in the second half of FY25. Concerns over the rupee’s overvaluation played a role in this approach. In November 2024, India's 40-currency trade-weighted real effective exchange rate (REER) reached a record high of 108.1, indicating overvaluation. However, a decline in the rupee led to a correction in REER to 102.4 by February 2025, aligning it closer to its five-year average of around 104.

While India's direct export losses from US tariffs remain limited, policymakers must closely monitor external risks. The larger question is how India will navigate future trade uncertainties and economic shifts in the global landscape.