Economists expect reciprocal US tariffs on Indian exports to be lowered to 15%-20% by the end of December, as there seems to be some concrete movement from both governments.
Importantly, most believe the additional 25% penalty duty, imposed on August 27, is on its way out after India has moderated its oil imports from Russia. “If the deal is well-negotiated, the overall tariff burden could fall to 15%, aligning India with other Asian peers and unlocking significant macroeconomic gains,” said Tanvee Gupta Jain, chief India economist, UBS.
Agreed Madan Sabnavis, chief economist at Bank of Baroda, who believes the tariff talks are moving in the right direction. “There is reason to believe that the 50% duty could come down to 25%, and even further to 15% depending on how much we give and take,” he said. He pointed to India’s diversification of oil imports from Russia to Saudi Arabia, Iraq, and the US as a strategic lever.
“Urban demand is responding to GST reforms. If the trade deal is signed before the December policy, the RBI will likely revise its GDP forecast above 7%,” said Gaura Sengupta, Chief Economist at IDFC First Bank, who sees signs of acceleration. However, she cautioned that Q3 GDP may still reflect residual tariff drag.
UBS’ Jain believes that with 10–15 million jobs at risk, a resolution is critical. However, she also cautioned that if the 50% trade tariff persists, it could drag growth by around 50 basis points in FY27, with knock-on effects on employment, consumption, and business confidence.
Rate cut or not?
The good news is that with inflation hitting an all-time low of 0.25% in October – the lowest in the current series – the space for a rate cut does exist. But economists are divided on whether there should be a rate cut.
Madhavan Kutty G, Chief Economist at Canara Bank, said, “From a growth standpoint, there is no need to do a rate cut.” “Even as we see space for one last 25 bps repo rate cut, it will be contingent on trade uncertainties and growth outlook,” added Jain of UBS, noting that the window for easing is narrow. UBS expects FY26 inflation to average 2–2.2%, versus RBI’s revised forecast of 2.6%.
Sabnavis of Bank of Baroda, however, urges caution. “We cannot have zero interest rates. Even if inflation is at 1%, cutting rates every time is not feasible,” he said. He emphasised the importance of maintaining real interest rates in the RBI’s ideal range of 1.4–1.9%, suggesting that a 5.5% repo rate is balanced if inflation averages 4–4.5%.
“We revised down our FY26 inflation forecast to 1.8% YoY (4% in FY27) while our growth is at 7.2%,” said Radhika Rao, Executive Director and Senior Economist of DBS Bank.
No optimism in bond market
Despite the inflation rate coming at an all-time low of 0.25%, the bond markets didn’t show any signs of optimism. “RBI purchases have helped contain yields, but the downward movement is limited. The rate-cutting cycle is ending, supply is rising, and demand for G-Secs is weakening,” added Sengupta, who is expecting the 10-year benchmark G-Sec to trade between 6.30–6.60%.
“The 10-year paper shows downward rigidity. We have to watch for the drainage of liquidity if the RBI intervenes in the spot market more frequently, which will again keep yields elevated, added Kutty of Canara Bank.
The RBI’s interventions in the foreign exchange and forward markets can also impact domestic liquidity, contributing to market nervousness.
