The imposition of import tariffs by the US is likely to see a 30-60 basis points downside risk to its FY26 growth estimate of 6.5 per cent for the Indian economy, Morgan Stanley Research said in a note.

On April 2, US President Donald Trump announced reciprocal tariff of 27 per cent on imports from India effective from April 9.

The US investment bank observed that the tariffs exceeded its expectations and added, “.........we expect the impact to be more pronounced through the indirect channel of weaker corporate confidence, which will dent the risk appetite and further defer the capex cycle.” It added, “In case of pronounced downside risks to growth, we expect policy makers to pause fiscal consolidation and increase capex spending to support domestic demand.”

A key monitorable would be the impending trade deal with the US, “the implementation of which by the fall of 2025 could help reduce the downside risk from the direct impact of higher tariffs.”

Direct impact

While the direct impact on India is likely to be less severe, what will have a bigger effect is a slowdown in US global growth and weak global trade momentum which will hit external demand. India’s goods exports to the US are at 2.1 per cent of total GDP and 1.7 per cent, if tariff-exempt sectors such as energy and pharma are excluded.

MS said it expected the Reserve Bank of India to cut key lending rate by 25 bps in its forthcoming monetary policy and the stance to be changed to accommodative due to the uncertain external demand environment. It also expected a deeper rate easing cycle with additional rate cuts of 50-70 bps “as the RBI will likely need to support domestic demand.”

Published on April 3, 2025