Moody's Cuts India GDP Forecast Amid US Tariff Turmoil Along With Asia-Pacific Economies

Moody's Investors Service has lowered its growth forecast for India's Gross Domestic Product. It is not India alone that has seen the slash in the growth forecast but a downward revision has come through for many Asia-Pacific economies.

Moody's highlights the palpable uncertainty in financial markets, evidenced by tumbling and volatile equity markets. The sustained rise in uncertainty is expected to erode household and business sentiment, potentially diminishing the effectiveness of anticipated monetary policy easing in 2025.

The brokerage has revised India's Gross Domestic Product growth forecast for 2025 downwards to 6.1% from our March baseline of 6.4%. This revision reflects concerns over a potential 26% tariff on imports by the United States, a major trading partner.

Moody's anticipates that sectors like gems and jewellery, medical devices, and textiles will experience the most significant impact on their trade balance. The outlook suggests that overall Indian economic growth will be relatively insulated from this external shock, as external demand constitutes a smaller fraction of the GDP.

Moody's expects the Reserve Bank of India to respond to easing headline inflation by lowering interest rates, likely through 25-basis point reductions, bringing the policy rate to 5.75% by year-end. This monetary easing, combined with previously announced tax incentives, is expected to bring up domestic demand. This can also partially offset the negative effects of the tariffs on overall growth compared to more vulnerable economies.

This trim in growth expectations is driven by the negative impact of recently announced and threatened US tariffs. The brokerage's April baseline scenario incorporates weaker growth prospects for several nations. This includes India, China, Japan, Vietnam, Taiwan, Indonesia, South Korea, New Zealand, the Philippines, Australia, Singapore, Hong Kong, and Malaysia.

While U.S. President Donald Trump recently announced a 90-day freeze on most of the harsh tariffs declared a week prior, replacing them with a blanket 10% tariff, the brokerage's April baseline still accounts for the potential economic damage should the initial tariffs be fully implemented.

US President Trump's subsequent announcement of an immediate increase in the effective tariff on China to 125% makes Moody's current baseline overly optimistic for China.

Even a sustained 10% tariff on most trading partners is projected to negatively affect many Asia-Pacific economies through both direct trade impacts and a reduction in intraregional trade.  

The Asia-Pacific region is struggling with uncertainty following the recent volatility in U.S. tariff policy. The initial announcement of substantial tariffs on several economies, including India, with tariffs ranging from 24% to 46% set to begin on April 9th, delivered a considerable shock.

While most of these have been temporarily rolled back to a 10% tariff for 90 days, the sharp increase in tariffs on China creates a significant divergence. Increased tariff costs and trade complexities are also projected to weaken global growth prospects, with the initial "Liberation Day" tariffs increasing the risk of a global recession.

Under that scenario, inflation in Asia was expected to remain subdued due to weaker trade and growth, while inflation in the U.S. would likely rise. Households won't want to spend more when the environment is so uncertain, regardless of stronger purchasing power, and businesses will hold back on additional investment as they navigate chaos, according to the brokerage.