Escalating trade tensions, tariff uncertainties to shape immediate course of world economy: RBI bulletin

Escalating global trade tensions and tariff uncertainties are likely to shape the immediate course of the world economy, according to the 'State of the Economy' article published in the RBI’s March bulletin.

While engendering heightened volatility in global financial markets, these have also caused apprehensions about the slowdown in global growth, it said.

The report suggested that India’s economy remains resilient, supported by a strong agricultural sector and rising consumption.

“Domestically, macroeconomic fundamentals remain strong, and economic growth is poised to sustain momentum driven by robust domestic demand, steady investment activity, and ongoing policy-driven infrastructure development along with a pick-up in government spending,” the report noted.

“The reverberations of a tumultuous external environment, however, are being reflected in sustained foreign portfolio outflows,” it added.

Foreign investors have pulled out ₹34,574 crore from the Indian equity markets in February pushing total outflows to ₹1.12 lakh crore in the first two months of 2025.

The article further said India's macroeconomic strength to face these challenges is bolstered by a decline in headline CPI inflation to a seven-month low of 3.6% in February 2025 on account of a further correction in food prices.

While bumper Kharif harvests, improved rabi sowing, ample reservoir levels, and seasonal drops in vegetable costs have fueled this decline, the central bank noted, the risks from volatile commodity prices and weather disruptions linger.

Globally, trade frictions, tariff-induced inflation, and financial market turbulence are testing economic resilience, according to the report.

The RBI pointed to fiscal stimulus in the euro area as a potential short-term growth driver, but cautioned that surging yields could raise borrowing costs and limit expansive policies.

While commodity prices are expected to soften with cooling demand, the pass-through of higher tariffs to consumers threatens inflation, especially in advanced economies (AEs) where price pressures remain persistent.

“Central banks in AEs would have to factor in such pressures while calibrating policy responses in an environment of potential slowdown in growth,” the article said.

“(Emerging market economies) EMEs, on the other hand, are likely to record higher growth than their AE counterparts, although capital outflows and potential currency depreciation remain major risks,” it added.