Context:
The Reserve Bank of India (RBI), in its monthly bulletin’s State of the Economy article, has warned that escalating trade wars and tariff tensions, particularly after Donald Trump’s return as US President, could adversely impact global growth and fuel inflation.
- A full-blown tariff war could:
- Raise US inflation by 1.0–1.2%.
- Lower US GDP growth by 0.6 percentage points in 2025.
- Result in the US economy being 0.3–0.4% smaller in the long run.
Global Financial Impact and Market Reactions
- As of March 17, 2025, the US dollar has lost all gains made since mid-November 2024, impacted by trade policy uncertainties.
- Gold prices surged to a historic high of $3,000 per ounce on March 14, 2025, driven by safe-haven demand.
- Financial markets are pricing in the anticipated global economic slowdown.
Impact on India’s Economy
- Despite external turbulence, the Indian economy continues to show resilience:
- The headline inflation rate dropped to a 7-month low of 3.6% in February 2025 (down from 4.3% in January) due to falling food prices.
- However, core inflation rose to 4.1% in February, up from 3.6% in January.
- Real GDP growth in Q3 FY25 was recorded at 6.2%, rebounding from previous quarter sluggishness.
Key Domestic Economic Indicators
- Private consumption expenditure has increased, indicating strong consumer confidence and sustained demand.
- Government spending has picked up, further boosting growth.
- Key sectors showing robust growth:
- Construction
- Financial services
- Trade
- High-frequency indicators point toward sustained growth momentum in Q4 FY25.
Monetary Policy and Liquidity Management
- In February 2025, the RBI reduced the policy repo rate by 25 basis points, the first cut in nearly five years.
- Another rate cut is widely anticipated in April 2025.
- The RBI has actively managed tight liquidity conditions due to tax outflows and foreign portfolio investor (FPI) withdrawals through:
- During the quarter, the RBI injected approximately ₹5.5 trillion of durable liquidity into the banking system.
Rising Bank Dependence on Certificates of Deposit (CDs)
- Amid ongoing liquidity tightness, banks have increased reliance on Certificates of Deposit (CDs) for funding.
- CD issuances in the primary market have grown by 34% year-on-year, reaching an all-time high of ₹10.58 trillion (up to March 7, 2025).
Strong Domestic Fundamentals Amid Global Challenges
- While global trade wars and tariff tensions loom large and could ripple through international financial systems, the Indian economy is bolstered by stable inflation, robust consumption, and government spending.
- The RBI’s proactive monetary measures and liquidity infusions aim to ensure financial stability and support continued domestic growth.
