While India’s economy remains resilient and is expected to sustain robust growth in FY25-26, Reserve Bank of India (RBI) has cautioned on escalating global trade protectionism, especially tariff actions by US, which poses a potential downside risk to exports and investment sentiment.
In its August 2025 Bulletin, RBI’s flagship article "State of the Economy" noted that India continues to stand out as one of the world’s fastest-growing economies, supported by strong domestic demand, government-led capital expenditure (capex) and a revival in rural consumption. However, the central bank underscored that external challenges are mounting, with global trade weakening under the weight of rising tariffs, supply chain realignments, and geopolitical tensions.
The report flagged US tariffs as a particular concern. “India faces headwinds from the recent wave of protectionist measures, including higher import duties by the US,” RBI economists say in the article, pointing out that such actions could weigh on India’s merchandise exports at a time when global demand is already softening.
The central bank observed that export growth has been relatively subdued compared to domestic drivers of the economy. Sectors with significant exposure to global value chains, such as textiles, engineering goods and IT-linked hardware are vulnerable to tariff hikes and shifting trade rules. The report warned that if tariff barriers widen, Indian exporters may face margin pressures, delayed orders and reduced competitiveness.
At the same time, RBI stressed that India’s external sector remains broadly stable for now, supported by strong services exports, robust capital inflows and healthy foreign exchange reserves. The current account deficit is under control, and the Indian rupee has shown relative stability against peer currencies.
Still, the central bank urged vigilance. “Trade protectionism remains an evolving risk factor, and India must strengthen its competitiveness through productivity gains, diversification of export markets, and trade agreements that secure long-term access to global supply chains,” the article says.
RBI also pointed out that, alongside tariffs, global monetary tightening, the slowdown in China and geopolitical uncertainties could amplify external risks. Despite this, it is projected that India could maintain growth above 7% in FY25-26, provided inflation remains anchored and policy reforms continue.
RBI highlighted that India has emerged as a growth outlier in a world economy still grappling with slowing trade, geopolitical tensions, and volatile commodity markets. “The macroeconomic environment in India remains conducive to non-inflationary growth,” the article observed, while cautioning that vigilance is needed on food inflation and external shocks.
On inflation, the central bank said headline CPI (consumer price index) is expected to remain aligned with its medium-term target of 4%, with core inflation at multi-year lows due to moderating input costs and competitive pressures. However, volatile food prices remain a risk, especially in perishables like vegetables and pulses. RBI underlined the need for continued supply-side interventions and buffer stock management to contain food-driven price spikes.
The article also flagged global uncertainties, including the impact of higher-for-longer interest rates in advanced economies, stress in China’s property sector, and disruptions from geopolitical conflicts. Despite these risks, India’s external sector is viewed as stable, with healthy foreign exchange reserves, a narrowing current account deficit, and strong capital inflows providing a cushion against volatility.
Financial markets, RBI noted, have remained broadly stable, supported by domestic liquidity and foreign investor confidence. Equity markets are buoyant, reflecting corporate earnings growth, while bond yields have eased on expectations of stable inflation. The rupee has also displayed relative stability compared to peer emerging market currencies.
On the policy front, the article reiterated the central bank’s focus on maintaining price stability while supporting growth. RBI emphasised that fiscal consolidation, continued infrastructure spending, and reforms to boost productivity will be critical for sustaining momentum.
Looking ahead, RBI projected that India is well placed to sustain real GDP growth of 7% or higher in FY25-26, making it one of the fastest-growing major economies. The report stressed that this performance could be strengthened by leveraging structural reforms, deepening digitalisation and accelerating the energy transition.
