There is continuous churn in global order with the USA President Donald Trump’s administration pushing for higher tariffs. Of the large economies, the USA has secured bilateral trade deals with EU, UK and Japan while negotiations have hit a wall with India, Brazil and China.
Trump’s punitive measures (additional 25%) on India came into being on August 27, 2025, on the pretext of continued buying of Russian oils, which Trump accuses of fuelling war in Ukraine, raising the total tariffs levied on Indian goods to 50%. India has rightfully called this as ‘unfair, unjustified and unreasonable’, given India is neither the largest purchaser of Russian oil, nor has it been seen the largest surge in trade with Russia post the war broke in Ukraine. The additional tariffs have put Indian goods at a relative disadvantage compared to its peers China (30% until next deadline ends in November 2025), Vietnam (20%), Japan (15%) and South Korea (15%).
Meanwhile, China has strategically tapped into unsettled global order to build a coalition of trading nations caught in Trump tariff disruptions with Shanghai Cooperation Organisation (SCO) promising a credible platform to nations seeking a rules-based world accommodating member Nation’s domestic priorities on trade, energy and security.
Most central banks have adopted a wait-and-watch stance till better clarity emerges on the US tariff situation. The next policy meetings for major central banks are scheduled in Mid-September with Bank of England and European Central Bank likely to keep pause on the rates whereas the probability of a rate cut by Bank of Canada and the US Federal Reserve has risen owing to a weak labour market and tariff-related sluggishness in the economy.
At the domestic front, India’s macro fundamentals continue to paint a resilient story. India’s real GDP grew at a five-quarter high growth rate of 7.8% in April-June period of financial year 2025-26, due to elevated public capex, robust rural demand, frontloading of exports and a benign deflator. India’s retail inflation for July 2025 came even lower at 1.5%, mostly due to volatile food prices with vegetables and pulses undergoing deepest decline in prices and disinflationary trend across all sub-components barring fruits, oil and fats. Core inflation remained at 4.2% due to sticky services and rise in gold prices.
High frequency data affirms continuing strength in domestic activity. The purchasing managers’ index (PMI) for manufacturing (59.3) was at a 17-year high in August 2025 owing to accelerated production volumes and robust new orders. Similarly, PMI services (62.9) also stood at 15-year high due to healthy external demand from Asia, Europe and US.
On the fiscal side, the Government unveiled next-generation reforms in goods and services tax (GST), aimed at simplification, demand stimulation and promoting ease of doing business. The GST Council has trimmed the extant six slab system to four, viz. 0%, 5%, 18% and 40%. The new 40% slab is for mostly sin goods and high-end luxury. Most goods and services now enjoy lower rates than earlier. The GST move will spur demand of consumption goods, encourage construction of both housing and infrastructure with lower rates on Cement, and improve health and life insurance coverage by exempting these services.
At the external front, India’s current account deficit (CAD) narrowed to USD 2.4 billion (bn) (0.2% of GDP) in Q1 FY26 from USD 8.6 bn (0.9% of GDP) in the year-ago period. Merchandise trade deficit (USD 68.5 bn) in Q1 FY26 was higher vs Q1 FY25 (USD 63.8 bn. Services exports rose in major categories such as business services & computer services.
The spread between yield on 10-year US Treasury (4.26%) and yield on 10-year India G-secs (6.47%) rose to 221 basis points (bps) in August 2025 making the Indian debt market more attractive, leading to net FPI inflows in the debt segment. The Indian G-sec yields however, have inched upwards as fears of higher supplies of sovereign papers gripped markets with anticipated fiscal response to tariff effected sectors.
With rise in sovereign bond yields, risk premium has also shifted upwards, making corporate bonds become costlier for issuers. This development places bank loans favourably for corporates, while reducing the urgency on lenders to price finer to attract and/retain good, rated borrowers. Besides, banks have also turn cautious in pricing risk down the rating curve with rise in loan delinquencies seen early this year. It reflected in rise in weighted average lending rates on fresh loans in July, notwithstanding frontloaded 100 bps repo rate cut from the Reserve Bank of India.
Ensuring monetary transmission hinges on synergy across markets, both bond and loan markets. It is time the regulator steps-in with open market security purchases to signal discomfort at market response, of late.
