Tariffs to hit growth, but India may dodge the worst: Guv Malhotra

Rupee free to move if global forces weigh, says RBI governor

The reciprocal tariffs imposed by the US will negatively affect domestic growth, but the impact on India will be far less severe than in many other countries, Reserve Bank of India (RBI) Governor Sanjay Malhotra said on Wednesday.

 

Domestic growth concerns prompted the RBI’s Monetary Policy Committee to cut the policy repo rate by 25 basis points to 6 per cent for the second consecutive policy meeting. The policy stance was also changed to ‘accommodative’.

 

“First and foremost, uncertainty dampens growth by affecting investment and spending decisions of businesses and households. Second, the dent in global growth due to trade frictions will impede domestic growth,” Malhotra said while announcing the monetary policy review and explaining the implications of trade-related tariffs.

 

However, he said it would be difficult to quantify the impact of the tariffs, as several unknowns remain — such as the effect of relative tariffs, the elasticities of Indian export and import demand, and the policy measures adopted by the government, including the proposed bilateral trade agreement with the US this fall.

 

“These make the quantification of the adverse impact difficult,” he said.

 

At the same time, he noted that from India’s perspective, the impact of these tariffs is relatively limited compared to other countries.

 

He pointed out that India’s exports account for about 12 per cent of gross domestic product (GDP), and the country’s exposure to the US market is less than 2 per cent. Citing the example of China, Germany, and the European Union (EU), Malhotra said India is in a better position than many other economies.

 

“In contrast, China’s exports represent around 19 per cent of GDP, Germany’s 37 per cent, and the EU’s over 30 per cent. Smaller countries, like Iran or Taiwan, have even higher export-to-GDP ratios. In this context, India is better positioned than many other economies,” he said.

 

“As for the tariffs, they are less significant for India because our trade surplus with the US is much smaller than that of other countries. This gives us a comparative advantage in the context of US tariffs. However, it is true that overall, such tariff issues could dampen growth.”

 

When asked about a currency devaluation competition amid the tariff war, Malhotra said that if there is downward pressure on the rupee due to global factors, it would be allowed to adjust accordingly. He reiterated that the RBI intervenes in the foreign exchange market only to curb excessive volatility.

 

“The market in India is deep and liquid, and market forces are best suited to determine the rupee’s value… That said, if there is excessive volatility or disruption in the currency markets, we are prepared to step in and provide support where necessary. We will intervene if required, but our approach remains focused on ensuring stability rather than targeting specific levels for the rupee.”