Trump Tariff Tensions: Direct impact manageable, but uncertainty could hurt India’s business confidence: Morgan Stanley
- Trump Tariff Tensions: Morgan Stanley believes while the direct impact of tariff hikes will likely be manageable, the indirect consequences, such as uncertainty affecting business confidence, are more concerning.
India is facing potential trade headwinds as the US President Donald Trump is considering imposing reciprocal tariffs, a move that could impact key sectors of the Indian economy. However, Morgan Stanley believes while the direct impact of tariff hikes will likely be manageable, the indirect consequences, such as uncertainty affecting business confidence, are more concerning.
US-India Trade Dynamics
The US is a crucial trade partner for India, accounting for 17.7% of its goods exports. India currently maintains a trade surplus of $45.7 billion with the US, though it remains lower than that of other Asian economies like China and Vietnam. However, India’s higher tariff rates — averaging 8.5% compared to the US’s 3% — make it vulnerable to reciprocal tariff policies.
Product wise tariff differential is stark and key segments, which could come under pressure due to reciprocal tariff hikes are electrical, industrial machinery, gems & jewellery, pharmaceuticals, fuels, textiles, iron & steel, autos, and chemicals, according to Morgan Stanley report.
Any tariff escalation could make Indian exports less competitive in the US market, potentially affecting growth in these industries.
Potential Policy Responses
Prime Minister Narendra Modi and US President Donald Trump have agreed to begin discussions on trade and tariff-related issues, said Foreign Secretary Vikram Misri.
Addressing a press briefing after a meeting between Modi and Trump in the White House, the Foreign Secretary said, “We have indicated, and the two leaders have agreed today to start discussing trade and tariff-related issues.”
India has already taken steps to reduce trade friction, including lowering import duties in the recent Union Budget 2025-26. The government reduced customs duties on high-capacity motorcycles and exempted 28 mobile phone battery components from tariffs. Additionally, basic duties on lithium-ion batteries used in electric vehicles have been eliminated to encourage green technology adoption.
Implications of Tariffs on India
The report warns that an increase of approximately six percentage points in India’s weighted average tariff rates, though unlikely, would still be manageable. However, indirect effects, such as prolonged uncertainty in global trade policy, could dampen business sentiment and foreign investments.
Morgan Stanley expressed concerns that certain sectors, particularly those already subject to high tariffs like motorcycles, may face further tariff hikes. Additionally, uncertainty surrounding trade and tariff policies could weigh on business confidence, potentially slowing global economic growth. Furthermore, heightened uncertainty may lead to increased risk aversion and a stronger US dollar, making it more challenging for central banks to effectively ease domestic financial conditions.
If downside risks materialize, Morgan Stanley expects India to respond with monetary policy easing — possibly deeper than the currently projected 50 basis points of rate cuts. The government could also increase capital expenditure to offset potential trade shocks.
“In particular, we anticipate the monetary policy easing could be deeper than that in our base case (potentially 100 bps of rate cuts vs base case of 50 bps) alongside incremental support through liquidity and macro prudential norms. While fiscal policy remains on a consolidating path, the event of a deeper slowdown in global growth could prompt policy makers to provide support through higher capex spending,” Morgan Stanley said.
Key Monitorables
Market watchers will closely track US tariff-related policies and trends in capital flows and the US dollar. Any shifts in US trade policy could have far-reaching consequences for India’s economic outlook in the coming months.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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