Trump’s Trade Salvo Threaten India’s Growth; Banks Brace For Aftershocks But RBI Unlikely To Blink On Rates

India’s economy is bracing for a jolt after Washington announced it will double tariffs on Indian exports, a move Fitch-owned CreditSights says could slow growth and squeeze several key industries. The US may not be India’s biggest trading partner in pure numbers, but for some sectors where America dominates, the pain could be real. Banks, too, could feel an indirect pinch if credit growth takes a hit.

Last Wednesday, the Trump administration slapped an extra 25% tariff on Indian goods headed to the US, in retaliation for New Delhi’s continued imports of Russian crude. The hike takes effect on August 27 and will lift the overall rate to a hefty 50%, double the existing 25% levy, putting India alongside Brazil at the very top of America’s tariff list.

CreditSights says the headline impact will be “manageable” since exports to the US account for only about 2% of India’s GDP, and domestic consumption and investment remain the main growth engines. Its sister company BMI expects GDP growth at 6.0% in FY26 and 5.6% in FY27 with the current 25% rate. Nevertheless, if the full 50% tariff sticks, they see growth dipping by another 0.2 percentage points in FY26 and 0.4 points in FY27. That said, talks could still pull the rate back, something other countries have managed in the past.

A long spell at 50%, though, would bite hard in industries that rely heavily on US buyers – textiles, jewellery, apparel, seafood, machinery, chemicals, and auto components among them. For each of these, the US is the top export market, and the higher duties could quickly erode competitiveness and margins. For banks, the direct risk looks limited. As of June 30, 2025, CreditSights’ data shows that fund-based and non-fund-based exposure to these vulnerable industries is under 10% of total lending. Plus, categories like auto parts or seafood sit within larger, more diversified lending segments such as vehicles, food, and engineering.

Still, the trouble may come through “second-order” effects. CreditSights warns of rising credit costs and, more importantly, a slowdown in corporate loan demand, which was already weak in Q1 FY26. Add in softer investor sentiment toward new projects, and banks could see credit growth stall and earnings pressured. With less than two weeks until the tariff hike kicks in, exporters and investors are hanging onto the hope of last-minute talks. If that hope fades, sectors deeply tied to US demand will face a tough reset, and banks could be left nursing a slower loan pipeline even as the broader economy leans on local consumption and investment to keep the wheels turning.

Growth, not prices, is now in focus but don’t expect the RBI to blink on rates just yet.

Most economists agree the Reserve Bank of India will keep its policy repo rate steady at 5.5% for now, even with inflation running at its lowest in seven years. The priority, they say, has shifted firmly toward protecting growth, but only a serious economic hit from the new 50% US tariffs would push the central bank into cutting rates further.

The latest data shows consumer price inflation easing to 1.55% in July, well below the RBI’s 2–6% comfort zone and the weakest since June 2017. Since February, the Monetary Policy Committee has already trimmed the repo rate by a full percentage point, but it left the benchmark unchanged at its meeting last week. The next policy call is due on October 1.

While the RBI has shaved 60 basis points off its inflation forecast for this financial year, it’s holding its GDP growth projection at 6.5%. HDFC Bank, for one, is sticking with a 6.3% growth estimate, citing possible offsets and the chance that US tariffs may be bargained down. The upcoming June-quarter GDP data, due August 29, will be closely watched, though it won’t yet reflect the tariff impact, since the higher US duties kicked in this month. For now, most analysts see 5.5% as the “terminal” repo rate. But some are leaving the door open for more easing.

HSBC India thinks that if weak high-frequency indicators from June persist, the RBI could mark down its growth forecast and deliver a 25 bps cut late in 2025, taking the rate to 5.25%. Nomura is even more dovish, pencilling in two 25 bps cuts, in October and December, to bring the repo rate to 5.00%. “The MPC’s data-dependent approach has left the door open to future cuts, even if it didn’t explicitly signal one,” Nomura said.

The Last Bit, 

The tariff shock is unlikely to derail India’s economy overnight, but it lands at a delicate moment. Growth is already losing some steam, corporate loan demand is soft, and global sentiment is jittery. While the direct trade hit is small in GDP terms, the concentration of US exposure in certain export-heavy sectors means the pain will be uneven, sharp for some, barely felt by others.

For banks, the danger isn’t a wave of bad loans but the slow bleed of weaker credit demand and investment appetite. That’s the kind of drag that doesn’t make headlines but chips away at momentum over quarters. The RBI, meanwhile, is caught in a wait-and-watch mode. With inflation comfortably below target, it has room to cut, but not the urgency unless the tariff dispute turns into a protracted squeeze on growth. In that case, rate cuts could arrive sooner than the consensus expects. Until then, the central bank’s bet is that domestic demand can carry the weight while exporters ride out the storm or that diplomacy steps in before the damage deepens.