Downside risk remains due to India-US trade uncertainties: RBI Bulletin

Continued doubts about IndiaThe Reserve Bank of India's (RBI) bulletin stated that although the inflation prognosis for the near future has become less dire than expected, US trade policies still provide a downside risk. On August 27, President Donald Trump imposed an extra 25 percent penalty for purchasing Russian oil, resulting in a 50 percent duty on Indian supplies to the United States. The penalty exceeds the 25 percent so-called reciprocal tariff. According to the August bulletin, favorable temperatures and rainfall portend well for the kharif season. In the second half of the fiscal year, demand might be bolstered by a rise in real rural wages. According to the report, the climate is favorable for sustaining aggregate demand when combined with the stable financial conditions, continuous rate-cut transmission, encouraging fiscal policies, and growing consumer optimism. With the help of favorable base effects and milder food price pressures, headline inflation is predicted to continue to decline below the 4 percent target in Q2 before gradually increasing in the last quarter of the fiscal year. It is anticipated that this year's average headline inflation will continue to fall well short of the goal. In order to determine the best course for monetary policy, the bulletin also stated that monetary policy would continue to keep a careful eye on the incoming data and the changing dynamics of domestic economy and inflation. The RBI bulletin noted that while India’s growth outlook has strengthened due to favorable domestic conditions, external headwinds from US trade policies continue to pose downside risks. The recent increase in tariffs on Indian imports, along with penalties related to Russian oil purchases, could weigh on trade flows and pressure the external sector. Despite these challenges, the inflation trajectory appears more comfortable in the near term. Softer food prices, aided by good rainfall and stable agricultural output, are expected to keep headline inflation below the 4 percent target in the second quarter. However, risks remain from global commodity volatility and potential supply-side shocks. On the growth front, rising rural incomes, improved consumer sentiment, and supportive fiscal measures are likely to drive demand in the second half of the fiscal year. These factors, coupled with the ongoing transmission of lower interest rates, could provide momentum to the economy even amid external uncertainty.