21-Aug-2025      10:54

Uncertainty driven by tariff and geopolitical uncertainty remains the major drag on growth, notes RBI minutes

The Reserve Bank of India on Wednesday released Minutes of the Monetary Policy Committee (MPC) meeting held during August 4-6. RBI guv Sanjay Malhotra said that tte global economy continues to traverse a period of heightened uncertainty on account of trade and tariff negotiations and lingering geopolitical tensions, the minutes noted. Global growth outlook, however, has improved at the margin for 2025 driven by front loading of exports in anticipation of tariffs, easing of financial conditions and fiscal expansion in advanced economies (AEs). The pace of disinflation, however, has slowed down and inflation continues to remain above the target in most AEs.

He also stated that uncertainty in external demand, driven by tariff and geopolitical uncertainty, remains the major drag on growth as it also hinders private investment intentions, which is yet to show visible signs of improvement. The RBI minutes noted that the private investment sentiment is adversely affected by the trade policy uncertainties. While the signing of the UK-India FTA is an important positive development, the US announcement of 25% tariffs on India is causing a lot of anxiety about the economic outlook.

The preliminary calculations suggest that these tariffs may hurt the growth rate in the current year by 20 to 30 basis points but given the fact that the US is a major market for India's exports of labour-intensive goods such as textiles and garments, leather goods, gems and jewellery, shrimp among other food products, the threat of job losses is more serious, the minutes noted. One can only hope that the penal tariffs for Russian oil purchase will be withdrawn and the ongoing bilateral trade negotiations will succeed in eventually bringing down the US tariffs on Indian exports to more manageable levels and broadly in line, if not better, with the Asian peers, such as ASEAN countries and Bangladesh and the disruption will be short-lived.

However, the uncertainty is affecting the investment climate. Going forward, diversification of markets for goods will be important. In that context, the negotiations of the India-EU FTA need to be expedited and the FTAs or the comprehensive economic partnership agreements with Japan and the Republic of Korea need to be reviewed to make them more effective, especially for the export of labour-intensive goods. Tapping the domestic market fully for the finished consumer goods by reducing the dependence on imports would also be helpful, the Reserve bank said.

RBI further noted that exports have been front-loaded, with exporters absorbing a larger share of the tariff costs. This means that the full impact of tariff tussles is yet to play out fully on the US economy and the rest of the world. In the second half of the fiscal year, global growth and inflation can turn out to be very different from the projected levels. The tariff tussle between the two largest economies will simultaneously unleash inflationary and deflationary pressures on the Indian economy.

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