The global economy has settled quietly to tariff-induced uncertainties, with global trade rising 7% in July 2025 from the level a year ago, which is higher than nominal GDP growth, thereby noting an improvement in the trade-to-GDP ratio.
While the European Union and Latin America have observed a shrinking trade surplus, China has continued to report an increase in its trade surplus, even as export prices soften, signaling dumping or diversion tactics to bypass tariffs. Meanwhile, the USA saw a rise in tariff revenues as a share of imports (11%), confirming the excessive costs paid by consumers. High tariffs are also evident in inflation figures for the USA, with personal consumption expenditures (PCE) inflation rising 2.7% year-on-year in August, an increase of forty basis points (bps) from April 2025. Notably, core PCE inflation, which excludes volatile food and energy prices, was 2.9% in August, primarily driven by core goods, a segment heavily affected by tariffs.
The US Federal Reserve (the Fed), however, found significant weakness in labor markets outweighing inflation concerns, leading to a 25 bps cut in the federal funds rate on September 17th, 2025, after holding steady for nine months. This move, described as a ‘risk management cut’ by Chairman J Powell amidst rising economic uncertainties, reflects caution. The increase in unemployment occurs despite a decline in immigration, suggesting sharper cuts in new jobs created in the economy. Furthermore, members of the US Federal Open Market Committee (FOMC) remain skeptical about inflation returning to the target anytime soon, with 2% inflation expected by the end of 2028. This outlook indicates that the Fed will proceed with rate easing at a slow pace going forward.
At home, Indian policymakers face the arduous task of navigating a tense geopolitical landscape, with the USA imposing punitive tariffs on India’s purchases of Russian oil—an act the Trump administration likens to India funding the Russian war in Ukraine. However, India strongly denies this allegation, as it is neither the largest purchaser of Russian energy nor has seen the biggest surge in trade relations since the war in Ukraine broke out. This reveals the West’s double standards in international relations, where the status of friends or foes is more a matter of convenience than of principles.
India, however, cannot afford to ignore the impact of rising U.S. tariffs for long, so it is moving forward with efforts to secure free trade deals with other partners. Meanwhile, the government has used this challenge as an opportunity to push through process reforms, most notably the goods & services tax (GST) rate rationalization to two slabs of 5% and 18%, aimed at making life easier.
Indian macros remain solid with a resilient 7.8% growth in the first quarter of 2025-26, low inflation, and fiscal and current account deficits at manageable levels. While the Indian rupee faces depreciation pressures due to heightened uncertainties in trade, India’s USD 700 billion forex reserves provide the capacity to respond to any significant volatility in the near term.
In the fourth bimonthly review of monetary policy for 2025-26, held from September 29 to October 1, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) unsurprisingly maintained a pause on the policy repo rate and its ‘neutral’ stance. Inflation projections based on the Consumer Price Index (CPI) for FY26 were revised downward to 2.6% from 3.1%, while FY26 GDP growth forecasts were adjusted upward to 6.8% from 6.5%. The MPC acknowledged demand moderation in the second half of FY26 due to trade-based headwinds. This led to softening the guidance on having policy space available for rate easing in the future.
This clarifies the communication confusion of June’s policy, which saw yields increase by 40 bps despite a 50 bps cut in repo rates, as the stance shifted with hawkish commentary signaling no more cuts ahead. The risk of fiscal slippage also contributed, as debt investors considered tax relief—both income tax and GST—against fiscal consolidation goals. Banks exploited this divergence in rate strategies across markets to slow the transmission, effectively undermining the monetary policy objectives.
The RBI, however, has tackled the issue by implementing regulatory easing to facilitate credit flows to key sectors, specifically infrastructure, MSME, and Housing.
Unveiling a range of measures that expand the banks’ role in supporting the commercial sector, including the withdrawal of the large exposure framework that discouraged specified borrowers from having bank loans above Rs 10000 crore. Additionally, the RBI permitted banks to engage in acquisition finance, which could help enterprises grow inorganically in a competitive global market. The expected credit loss (ECL) regime will further strengthen the banking system. Similarly, arrangements on foreign exchange will help exporters better navigate the external environment while promoting the internationalization of the rupee.
In summary, the fourth bimonthly review has energized the monetary policy landscape, leaving markets optimistic about further interest rate cuts while banks have more room to support growth. The government has effectively introduced process reforms to improve ease of doing business and boost consumption, which together mitigate the impact of external headwinds while fostering Indian entrepreneurship.
