Monetary Policy Response to Reciprocal Tariffs
The Reserve Bank of India (RBI) Governor Sanjay Malhotra announced measures in response to the reciprocal tariffs imposed by the US, which are expected to impact domestic growth negatively.
Policy Measures and Rationale
- The Monetary Policy Committee cut the policy repo rate by 25 basis points to 6%, marking the second consecutive reduction.
- The policy stance was changed to ‘accommodative’ to address domestic growth concerns.
Impact Analysis
Malhotra discussed the broader implications of trade-related tariffs:
- Uncertainty from tariffs affects investment and spending decisions, dampening growth.
- Global growth impeded by trade frictions could further hinder domestic growth.
- Quantifying the impact of tariffs is challenging due to variables such as relative tariffs, elasticities of India's export and import demand, and government policy measures.
India's Position in Global Trade
India's exposure to US tariffs is relatively limited compared to other nations:
- Export-to-GDP ratios: India's exports account for about 12% of its GDP, with less than 2% exposure to the US market.
- In contrast, China's exports represent around 19% of GDP, Germany's 37%, and the EU's over 30%.
- India has a smaller trade surplus with the US, providing a comparative advantage in the context of US tariffs.
Exchange Rate Policy
Regarding potential currency devaluation competition:
- The RBI allows the rupee to adjust to global factors, intervening only to curb excessive volatility.
- The Indian market is deep and liquid, with market forces determining the rupee’s value.
- The RBI focuses on ensuring stability rather than targeting specific currency levels.
