RBI Governor Warns of Tariff Impact on Growth
MUMBAI: Reserve Bank of India (RBI) Governor Sanjay Malhotra expressed significant concern over the adverse effects of tariffs on economic growth, particularly in light of U.S. trade policies. During a recent address, he highlighted how uncertainty stemming from these tariffs could dampen investment and spending, ultimately hindering domestic growth. While inflation remains a factor, Malhotra emphasized that the immediate threat to growth is more pressing.
Tariffs and Economic Uncertainty
Malhotra outlined the multifaceted impact of tariffs on the global economy, noting that uncertainty can stifle growth by affecting both business investments and household spending. He pointed out that trade frictions could lead to a slowdown in global growth, which would, in turn, impede domestic economic expansion. “Higher tariffs will negatively impact net exports,” he stated, underscoring the interconnectedness of global trade dynamics.
He also acknowledged the complexities involved in quantifying the adverse effects of tariffs, citing “known unknowns” such as the relative impact of tariffs and the elasticities of export and import demand. Malhotra mentioned that the government’s proposed foreign trade agreement with the U.S. could also influence these dynamics. Despite these challenges, he reassured that while the RBI must remain vigilant regarding inflation, it is not currently a major concern.
Domestic Growth Strategies
To mitigate the potential fallout from global trade tensions, Malhotra urged a focus on bolstering domestic economic drivers. He suggested that banks should be encouraged to reach small borrowers more effectively. This could involve partnerships between smaller lenders and larger institutions to facilitate loans to small businesses through a co-lending model. Such initiatives aim to enhance access to credit for small enterprises, which are vital for economic growth.
Malhotra noted that the impact of tariffs on India is relatively less severe compared to other countries, primarily due to the lower share of exports in the country’s GDP. This provides a buffer against the immediate effects of global trade disruptions.
Revised Growth and Inflation Forecasts
In light of the ongoing uncertainties, Malhotra announced a downward revision of the growth and inflation forecasts for the fiscal year 2025-26. The growth rate has been adjusted down by 20 basis points to 6.5%, while the inflation forecast has been lowered to 4%. He indicated that many forecasts for global GDP growth have also been revised down by 20-30 basis points, reflecting the broader economic challenges posed by tariff frictions.
Malhotra also hinted at the possibility of further rate cuts, stating that with inflation now within the target range, the trend for real interest rates is likely to decline. He emphasized that the effects of the RBI’s previous rate cuts would take time to permeate through the economy, as evidenced by the lag observed when rates were previously raised.
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