The global markets have been shaken by the implementation of tariffs by US President Donald Trump. Even as US Treasury Secretary Scott Bessent has tried to ease concerns, calling these tariffs "just baseline tariffs and open to negotiation," Neelkanth Mishra, chief economist at Axis Bank, highlighted the bigger issue: how countries will respond.
"Some countries will have no option but to devalue their currency," Mishra told NDTV Profit.
Mishra pointed to China's mounting balance of payments pressure, driven by capital flight and decreased foreign direct investment. With China's trade surplus narrowing and tariffs impacting the economy, he predicts the country might be forced to devalue the yuan.
The risk of a currency war is high, and once devaluation begins, the situation could spiral into an unpredictable environment. Mishra argued that this would trigger uncertainty in global financial markets, as the balance of trade between countries shifts and industrial policy measures like export subsidies and currency devaluation come into play.
The US administration's objectives are not purely economic but political, seeking to reshape global trade dynamics by moving away from multilateral agreements to bilateral ones, according to Mishra.
While some of the tariffs will likely be negotiated down, others may remain, serving as a tool for revenue generation and to address the US dollar's dominance in global trade.
For India, Mishra sees the risks as relatively low. India's exports to the US form a small percentage of its GDP, and the impact of the tariffs could be mitigated by US consumers absorbing much of the cost.
The greater concern for India, Mishra notes, is the potential for a global economic slowdown, which could dampen investor confidence and affect financial markets, especially with India's low equity risk premium amid global uncertainties.
However, India is better positioned than many other economies, thanks to fiscal and regulatory easing, along with decisive monetary policy actions by the RBI, Mishra said.
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