Impact of U.S. Tariffs on India’s FY26 Macroeconomic Outlook

• The newly imposed U.S. tariffs are expected to dampen India’s FY26 GDP growth by 20–40 basis points.
• Revised Growth Trajectory:
  • Union Budget Estimate: 6.8%
  • BoB Revised Forecast: 6.6% (↓20 bps)
  • Barclays Forecast: 6.5% (↓30 bps)
• Quantitative Implication:
  • GDP expected to fall from a projected ₹200.7 lakh crore to between ₹200.1–₹200.3 lakh crore.
  • The deceleration is externally induced and not due to weakening domestic fundamentals, indicating a vulnerability to trade policy shocks.

External Sector Pressure: Export Exposure Concentration

• Tariff-sensitive exports account for 9–11% of India’s shipments to the U.S., making the economy moderately exposed.
• High-Risk Segments:
  • Electronics and machinery: capital-intensive, large backward linkages
  • Precious stones and garments: SME-heavy, labor-intensive
• FY24 Baseline:
  • U.S.-bound exports = ₹6.4 lakh crore
• Impact Projections:
  • BoB: ₹64,000 crore decline (10% of total)
  • Jan FY25 data: Exports already down 2.4% YoY, even before tariff effect
  • Cumulative risk (FY25): Up to ₹57,000 crore loss in export value

Inflation Outlook: Currency as Transmission Channel

• BoB currency-inflation modeling:
  • 10% INR depreciation → +0.12–0.16% in WPI short-term
  • Longer-term pass-through effect → +0.38–0.49%
• This suggests imported inflation risk via raw materials and capital goods, especially in sectors affected by dollar-denominated contracts.

Policy Response Matrix

• Monetary Policy:
  • Elara Securities anticipates a 50 bps rate cut by RBI in FY26
  • This implies policy is expected to lean accommodative despite global rate volatility
• Fiscal Posture:
  • No revisions announced, but government may need to deploy export credit support, incentives, or targeted SME relief

Corporate & Financial Sector Implications

• Revenue Compression Risk:
  • Export-facing firms may reduce prices to maintain competitiveness, compressing margins
• Banking Sector Sensitivity:
  • SMEs in gems & jewelry, apparel, and electronics could face cash flow stress
  • BoB flags need for enhanced monitoring of these borrower segments

Strategic Outlook

• Mitigation Options:
  • Ministry of Commerce is reviewing strategic responses, including bilateral negotiations
  • Medium-term response could involve diversifying export markets and strengthening FTA frameworks
• Structural Insight:
  • India’s exposure to external tariff shocks is relatively contained, but its dependence on a few high-value sectors for U.S. exports amplifies the short-term pain.

The economic fallout from U.S. tariffs, while manageable in absolute macro terms, reveals India’s export vulnerability to bilateral frictions. Sectoral stress, especially among SMEs and dollar-sensitive exporters, could have knock-on effects on employment and credit quality. The policy mix will need to carefully balance external stability, growth support, and inflation management going into FY26.

TH