India is well positioned to deal with the negative effects of US tariffs and global trade disruptions, due to its large domestic economy and low dependence on exports, Moody's Ratings said in a report published on Wednesday. India-made goods may even benefit from increased US demand if trade talks lead to lower tariffs on India, compared to other emerging markets, according to the ratings agency.
"We expect 10% universal tariffs and 30% tariffs on most Chinese goods exports to the US will constrain global growth, potentially reducing India's economic growth in calendar year 2025 to 6.3% from 6.7%," the ratings agency said. Nonetheless, this growth rate will be the highest among G-20 economies.
The government's infrastructure spending supports GDP growth, while personal income tax cuts bolster consumption. India's limited reliance on the trade of goods and its robust service sector are mitigants to US tariffs.
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The effects of US tariffs will likely be muted for most infrastructure sub-sectors as they cater mostly to domestic demand and benefit from supportive regulatory or contractual arrangements, according to Moody's. Strong demand for segments like power, transportation and digital infrastructure will continue to attract significant capital investments over next five-seven years, it added.
Despite global volatility, India's sound banking market and stable credit conditions underscore its economic strength, the ratings agency added. Still, a deterioration in global economic and credit conditions would have knock-on effects.
Easing inflation offers the potential for interest rate cuts to further support the economy, even as the banking sector's liquidity facilitates lending.
Exchange rate fluctuations can weigh on the pace of monetary policy easing, cautioned Moody's. Lowering rates too fast can drive up capital outflows and lead to faster depreciation of the rupee, which weakened significantly against the US dollar late last year but strengthened somewhat, alongside other emerging market currencies more recently.
Non-interest income for banks will be strong on the back of large business volumes, led by wealth and insurance services, and opportunistic bond gains. "Overall, we expect the systemwide return on assets will moderately decline to a range of 1.25%-1.40% in FY26 from 1.40% in first half of fiscal 2024-25," Moody's said.
Pakistan-India tensions, including the flare-up earlier in May, would weigh on Pakistan's growth more than on India's.
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