RBI Bulletin: US Tariffs To Hit Net External Demand, But GST Cuts Will Mitigate Adverse Impact

The Reserve Bank of India, in its monthly bulletin, acknowledged the potential adverse impact of US tariffs on India's merchandise exports, but highlighted the support offered to the economy by the recent rationalisation in goods and services tax rates.

"The high US tariffs, unless resolved, could reduce India’s merchandise exports to the largest export destination, adversely impacting net external demand," stated the bulletin, published on Monday.

However, the recent structural reforms, including the implementation of GST 2.0, are expected to boost domestic demand and output, "which may mitigate the adverse impact of US tariffs", the central bank said.

Notably, the US has slapped Indian imports with tariffs as high as 50%, which is at par with Brazil and highest among America's Asian trading partners.

The recent trade data, however, showed India's overall exports continued to climb in September, as the slump in shipments to the US was compensated by a sharper increase in non-US exports.

Exports to non-US markets grew 10.9% year-on-year, outpacing the 6.6% growth in August. Overall, the exports in September grew by 6.7% on an annual basis to $36.38 billion.

'Indian Economy Resilient'

The bulletin stressed that the Indian economy "has displayed resilience" amidst broader global uncertainty and weak external demand.

Global uncertainty has edged up, the RBI said, adding that in the US, both trade and economic policy "uncertainty increased in September".

"Investor sentiments dampened in October, on renewed US-China trade tensions and prolonged US government shutdown, after a phase of buoyancy," it added.

The bulletin also pointed towards India's control on retail inflation, with consumer price index-based inflation falling to 1.54% in September, which is the lowest since 2017.

However, the headline inflation is expected to edge up in the second half of the fiscal due to unfavourable base effect and the GST rate cuts, which are expected to boost consumption.

In the context of inflation, the bulletin describes the US tariffs as a "supply-side shock", which will have an adverse impact on the United States rather than its trading partners.

"In the US, tariffs are likely to function as a supply-side shock, gradually passing through to consumer prices and pushing inflation higher in the latter half of 2025. In contrast, higher tariffs are expected to dampen export demand and thereby exert downward pressure on inflation in other regions," it stated.