India may benefit from lower US tariffs than other APAC economies: Moody's

India may be subject to lower tariffs than many countries in the Asia Pacific, which could help the economy attract further investment and become a global manufacturing base, Moody's Ratings said on Thursday.

In its outlook on Asia Pacific sovereigns, Moody's Ratings said many export-reliant APAC economies were hit with very high US tariffs in April.

While negotiations will likely lead to some reduction in tariffs and other trade barriers on a bilateral basis, policy uncertainty is challenging investment decisions and disrupting trade.

Uncertainty about trade policy and a potential overhaul of global trade have raised cyclical and possibly structural credit risks in APAC, it said, adding that economies like Vietnam and Cambodia, which benefited from a diversification of investment and manufacturing out of China and now face high US tariffs, are particularly at risk.

"In contrast to countries like Cambodia and Vietnam, India has the potential to emerge as a beneficiary of a tariff-driven shift in investment and trade flows. India may be subject to lower tariffs than many in APAC, which could help the economy attract further investment flows and support its development as a global manufacturing base," Moody's Ratings said.

The signing of a free trade agreement with the UK in May and ongoing efforts to establish the same with the EU will further support such development. However, the US goal to reshore select manufacturing segments could challenge the extent to which India benefits, it added.

On April 2, the US imposed an additional 26 per cent reciprocal tariff on Indian goods but suspended it for 90 days. However, the 10 per cent baseline tariff imposed by America remains in place. India is seeking full exemption from the additional 26 per cent levy.

Currently, officials of India and the US are negotiating a proposed interim trade agreement between the two countries. While India is seeking greater market access for its labour-intensive goods, the US wants duty concessions for its agricultural products.

These talks are important as the suspension of US reciprocal tariffs is ending on July 9. The two sides are looking at finalising the talks before that.

Moody's also said that potential shifts in investment and trade flows stemming from tariffs will take years to materialise, and it is unlikely that multinational companies will make drastic investment changes while there is still significant uncertainty about the magnitude of tariffs and whether they will persist.

"Instead, companies will likely slow or pause ongoing investments while they wait for a steady state on trade policies to emerge. Even then, any decision to relocate manufacturing or product sourcing will take years to execute," Moody's said.

In light of the weaker economic outlook, we expect the interest rate environment in APAC and globally to become more accommodative over the second half of 2025, Moody's said.