The Reserve Bank of India (RBI) issued a stark warning in its October 2025 bulletin about the escalating trade tensions with the United States, where 50% tariffs on most Indian goods—imposed as a penalty for New Delhi's purchases of discounted Russian oil—have triggered a sharp decline in bilateral exports. Effective from late August, the duties combine a 25% standard rate with an additional 25% surcharge, severely impacting labour-intensive sectors like textiles, ready-mades, gems and jewellery, shrimps, leather goods, and engineering products. According to Global Trade Research Initiative (GTRI) data, shipments to the US plummeted 20.3% to $5.5 billion in September from $6.9 billion in August, marking the fourth consecutive monthly drop and erasing over $3.3 billion in trade volume since May.
Overall, exports to America's market have fallen 37.5% from $8.8 billion in May, threatening jobs for millions in small and medium enterprises. Pharmaceuticals and semiconductors remain exempt, offering some relief, but the US—India's largest export destination—now faces potential losses of up to $36.5 billion annually if unresolved. The bulletin, published on October 20, frames these tariffs as a "supply-side shock" primarily burdening the US economy through higher consumer prices and inflation in late 2025, while dampening demand elsewhere.
Despite the external headwinds, the RBI highlights domestic resilience, bolstered by recent structural reforms, including the implementation of GST 2.0 with drastic rate cuts effective September 22. These reductions on daily essentials and commodities are projected to stimulate consumption and output, partially offsetting the tariff-induced drag on net external demand. "The GST rate cuts are expected to boost domestic demand and output, which may mitigate the adverse impact of the US tariffs," the analysts noted, emphasising that India's export reliance on the US is moderated by diversification efforts.
Indeed, September's overall merchandise exports rose 6.7% year-on-year to $36.38 billion, driven by a robust 10.9% surge to non-US markets like the UAE, China, and Europe—outpacing August's 6.6% growth. Imports, however, ballooned to $68.53 billion, fuelled by gold and silver price rallies of 60% and 72% year-to-date, widening the trade deficit to $32.15 billion. The bulletin underscores that these reforms, alongside a credible monetary-fiscal framework, have fortified macroeconomic fundamentals amid global uncertainties.
Inflation trends further illustrate this balancing act, with retail prices dipping to a 99-month low of 1.54% in September, supported by favourable monsoons and subdued global commodity costs. Yet, the RBI cautions of a rebound in the fiscal second half due to base effects and heightened spending from GST relief, potentially edging headline CPI upward. This dynamic echoes broader policy challenges: while tariffs risk supply-chain disruptions and rupee volatility, domestic levers like the 100 basis-point repo rate cuts earlier in 2025 have transmitted effectively to lending rates, sustaining credit growth. The central bank maintained the repo rate at 5.5% in its October 1 meeting, adopting a neutral stance to monitor these crosscurrents. Analysts from Crisil and ICRA project CPI averaging 2.6% for FY26, below the 4% target, preserving room for future easing if inflation stabilises.
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Ultimately, the RBI portrays an economy exhibiting "resilience despite global uncertainty and weak external demand", with strengthening urban revival and robust rural consumption as key pillars. Corporate and bank balance sheets remain solid, foreign reserves are adequate, and high-frequency indicators—like record GST e-way bills and digital payments—signal festive-season momentum.
While unresolved tariffs could shave 0.5-1% off GDP growth in H2 FY26, the bulletin concludes that focused reforms are transforming headwinds into opportunities for diversification and self-reliance. As India navigates this trade war—likened by experts to a "diplomatic crisis"—the interplay of external shocks and internal buffers will define its trajectory toward sustained 7%+ expansion.
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