India's anticipated GDP growth for FY26 remains unscathed by US tariffs, asserts BofA Securities, maintaining their projection at 6.5% - here's the reasoning behind it.
The imposition of US tariffs on Indian exports is set to have a significant impact on India's GDP growth projections for the fiscal years 2026 (FY26) and 2027 (FY27).
Analysts predict that a 25% tariff rate could slow India's GDP growth to about 6% in FY26 and 5.6% in FY27. If the tariff rate increases to 50%, forecasts indicate a further reduction in growth by 0.2 percentage points in FY26 and 0.4 percentage points in FY27.
The sectors most likely to be affected include garments, precious stones, electronics, pharmaceuticals, auto parts, and MSMEs. Exporters and trade experts are concerned that these higher tariffs could make Indian goods significantly costlier, potentially reducing exports to the US by 40-50%.
Despite these challenges, major rating agencies like S&P Global Ratings maintain a positive sovereign outlook for India, citing its limited trade-oriented economic structure and strong domestic demand. The impact on India's economy is considered manageable since exports to the US account for only about 2% of India's GDP.
As for Bank of America Securities' view on the matter, specific information is not readily available. However, other financial institutions and analysts generally expect the impact to be significant but manageable, with potential for negotiations to mitigate the effects. BofA Securities believes that with the additional tariffs, policymakers face heightened uncertainty on the macro outlook.
In the meantime, the Indian economy remains resilient despite global uncertainties. Manufacturing slowed in Q1FY26 due to weakness in the auto sector, but agriculture growth is projected at 5.5% YoY, partially aided by a good monsoon. Construction is expected to remain robust at around 8% growth.
The policy stance of the Reserve Bank of India (RBI) remains 'Neutral'. The Monetary Policy Committee (MPC) announced by the RBI Governor Sanjay Malhotra had retained its GDP growth forecast for FY26 at 6.5%. The RBI has also retained its real GDP growth forecast for FY26 at 6.5%.
The WPI inflation fell to a 25-month low of -0.58% in July due to decreases in food and fuel prices. The RBI announced a cautious hold on interest rates in its last meeting, keeping it unchanged at 5.50%.
Services growth will see mixed trends, with transport services picking up and financial services under pressure. S&P Global upgraded India's rating to 'BBB'. Q1FY26 GDP growth, as projected by BofA Securities, is 6.8%. BofA Securities maintained that with RBI frontloading the rate cuts, credit disbursement is likely to improve in coming quarters.
Rahul Bajoria of BofA Securities suggests that the government may consider measures to relieve the impact on exporters in labor-intensive sectors, but only once the new economic outlook becomes clearer. Goldman Sachs warns that India's GDP hit from US tariffs could be around 0.6 percentage points.
Negotiations and potential trade agreements are seen as crucial in determining the final economic outcome. The Indian government and the US administration are expected to engage in discussions to address these issues and find a mutually beneficial solution.
- The potential impact of US tariffs on India's economy extends beyond GDP growth, affecting sectors like finance, mining, and business, as exporters in labor-intensive sectors might need relief measures.
- Financial institutions and analysts anticipate a significant but manageable impact on India's economy, with potential for negotiations to mitigate the effects, especially in the areas of finance and investment.
- Despite the uncertainties imposed by increased tariffs, the Indian economy continues to show resilience, with key sectors such as agriculture, construction, and services maintaining growth, albeit with mixed trends.
- The Reserve Bank of India (RBI) keeps a 'Neutral' policy stance, and despite the WPI inflation falling to a 25-month low, the RBI has maintained its interest rate, balancing inflation control and economic growth in finance and the market.
- As the new economic outlook becomes clearer, Defi and other decentralized finance systems may potentially provide alternative avenues for Indian businesses and exporters to navigate increased tariffs, ensuring continued growth and investment in the country.
