Starting in November 2025, there are signs of a thaw in the trade war between the two largest economies in the world, with the USA reducing fentanyl-related tariffs on imports from China from 20% to 10%. This lowers the effective tariff rates on Chinese goods imported to 47% from 57%. Additionally, the USA will keep its suspension of increased reciprocal tariffs on Chinese imports until November 10, 2026.
China has reciprocated by easing controls on rare earth supplies, thus removing a major concern for the US-based semiconductor industry and boosting its purchase of soybeans. These developments are important because the tariffs have apparently done more harm than good to the US economy, with job growth slowing down and inflation rising over the past few months.
China, meanwhile, continues to report strong shipment growth, rising 8.3% year-on-year in September 2025, even though exports to the USA have plunged, signaling strong competitiveness and trade diversification to other markets. Interestingly, while China’s exports to the US fell, its trade surplus with the US slightly increased month-on-month in September, affirming strong control over imports—giving China better leverage in ongoing trade negotiations.
India, on the other hand, has seen a decline in export demand as 50% tariffs take effect. India’s merchandise exports to the US fell 11.9% y/y to $5.46 billion while imports rose 11.8% y/y to $3.98 billion in September 2025. On a cumulative basis, India’s trade balance during April-September 2025 deteriorated (USD 155.3 billion as against USD 145.3 billion in April-September 2024). Among sectors most exposed (USA share >30%), while exports of clothing & textiles and chemicals suffered, exports of gems & jewelry and marine products remained resilient.
Seen alongside the decline in foreign investment flows, Indian authorities must act quickly to diversify exports and offset trade challenges from the US. At USD 695 billion, India’s forex reserves remain reassuring, however.
High-frequency indicators show a strong performance of the Indian economy. With the southwest monsoon ending 8% above the long-term average, India’s kharif sowings surpassed the previous year’s area. Industry output rose 4% year-over-year in September 2025, driven by a 4.8% year-over-year increase in manufacturing output. For the fortnight ending October 17th, 2025, bank credit growth (11.5% year-over-year) outpaced deposit growth (9.5% year-over-year), indicating demand optimism amid the festive seasons.
Survey-based indicators like the composite purchasing managers index (PMI) remained strong at 59.9 in October 2025 (although down from 61.0 in September 2025). PMI readings above 50 indicate expansion, while readings below 50 signal contraction. Importantly, after the Goods and Services Tax (GST) rate rationalization in late September 2025, GST revenues increased by 4.6% year-over-year to Rs 1.96 trillion in October 2025, reflecting sustained consumer demand during the festive season.
On the monetary policy front, acknowledging weakness in the labor markets, the US Federal Reserve, in its meeting held on October 28-29, lowered the federal funds rate by another quarter point to below 4 percent while signaling rates approaching neutral levels, thus downplaying the chances of further cuts this year. The European Central Bank, however, chose to keep rates unchanged amidst ongoing global trade disputes and geopolitical tensions.
At home, RBI also kept policy rates on hold while acknowledging room for a future rate cut as inflation remains benign. The regulator, however, announced a series of initiatives aimed at easing credit conditions for the economy, giving banks more opportunities to lend, including financing mergers and acquisitions and removing guidelines that restrict bank exposure to large borrowers, along with a smoother transition to the expected credit loss (ECL) regime, thereby aligning Indian banking standards with global ones.
The weighted average lending rate (WALR) for scheduled commercial banks has decreased by 60 basis points (bps) for outstanding loans and 75 bps for new loans during January-September 2025. Banking liquidity remains surplus as the gradual reduction of the one percentage point cash reserve ratio (CRR) releases Rs 2.5 trillion, facilitating the transmission of previous rate cuts. Although festive season spikes in currency circulation have been modest, RBI’s forex interventions to support the rupee have likely drained durable rupee liquidity, which is reflected in call rates rising above the repo rate lately.
Bond markets have also behaved differently, with the 10-year benchmark yield staying above 6.5%, indicating a term premium of over 100 basis points. Encouragingly, the risk premium—defined as the spread of AAA-rated corporate bond yields over government bonds of the same maturity, such as 5 years—has eased by 15 basis points month-on-month in October 2025, suggesting reduced market uncertainties. It is time for regulators to signal concern over the divergent movement of rates across the market, possibly through direct interventions like open market operations (OMOs) or by cutting the repo rate, as such actions could undermine the monetary stimulus needed for growth amid a challenging global environment.
