India-US trade uncertainties pose downside risk to overall demand: RBI Bulletin

Uncertainties surrounding India-US trade relations continue to pose a downside risk to overall demand, even as domestic economic conditions remain supported by benign inflation, strong monsoon progress and favourable financial conditions, the Reserve Bank said in its latest bulletin.

In its State of the Economy article published in the August edition of the RBI’s monthly bulletin, the central bank noted that while kharif sowing has gained momentum and rural demand has shown resilience, external headwinds could weigh on India’s growth outlook.

According to the central bank, favourable rainfall and temperature conditions bode well for the kharif agriculture season and an increase in real rural wages may support rural demand in the second half of the financial year.

"Coupled with the benign financial conditions, ongoing transmission of rate cuts, supportive fiscal measures and rising household optimism, the environment is conducive for holding up aggregate demand.

"On the other hand, persisting uncertainties related to India-US trade policies continue to pose downside risk," it noted.

The article observed that steep tariffs imposed by the US on Indian exports in recent months, despite temporary exemptions in some categories, could adversely impact external trade. Merchandise trade deficit widened in July 2025, primarily on account of a higher oil deficit, while non-oil deficit remained steady.

GST collections and e-way bills scaled record highs, though electricity demand and industrial activity remained subdued. Manufacturing and services, however, sustained their expansionary momentum.

The RBI expects average headline inflation this fiscal to remain significantly below the 4% target, with food price pressures muted by favourable base effects.

"Headline inflation, driven by muted food price pressures supported by favourable base effects, are likely to soften further below the 4 per cent target in Q2 before inching up in the last quarter of the financial year.

"Overall, the average headline inflation this year is expected to remain significantly below the target. Monetary policy, going forward, would continue to maintain a close vigil on the incoming data and the evolving domestic growth-inflation dynamics to chart out the appropriate monetary policy path," the bulletin said.

While 10-year G-sec yields hardened in July and early August due to trade-related uncertainties, they briefly eased following S&P’s upgrade of India’s sovereign rating on August 14, the bulletin added.