Aiyar cautioned that the simultaneous downturn in the world’s two largest economies would inevitably exert a strong downward pull on the entire global economy.

While the recent trade tensions between the United States and India have garnered significant attention, economists warn that a potential slowdown in the world’s two largest economies, the US and China, poses a far greater threat to India’s economic stability. Swaminathan Aiyar, a prominent economist and consulting editor at ET Now, emphasized that the ripple effects of a major recession in these global powerhouses would significantly outweigh the impact of any bilateral tariff disputes.   

Aiyar’s concerns arise amidst escalating uncertainty in the global economy, largely fueled by President Donald Trump’s aggressive trade policies. Despite a temporary 90-day pause on planned tariffs against several nations, including India, following a sharp decline in US stock markets, the underlying tensions remain. Moreover, China’s retaliatory measures, including increased tariffs on US goods, further exacerbate the situation.   

The economist had previously criticized Trump’s tariff announcements, labeling them a potential “Recession Day” rather than a “Liberation Day,” as the president had claimed. He argued that these policies would disrupt global supply chains, impede economic growth, and plunge the world economy into turmoil. Aiyar dismissed Trump’s assertion that tariffs would revitalize American manufacturing, predicting instead economic disruption.   

The erratic nature of Trump’s trade policies, with frequent changes occurring within hours, has created a climate of uncertainty for economists and investors. Goldman Sachs, while revising its recession forecast, still anticipates a significant US economic slowdown. Conversely, JPMorgan Chase maintains a more cautious outlook, assessing the probability of a US recession as still higher than not. This divergence in expert opinion underscores the precarious state of the global economic landscape, even after the temporary tariff reprieve.   

India’s central bank, the Reserve Bank of India (RBI), has already responded to these growing global uncertainties by reducing its economic growth forecast for the current financial year. The RBI also lowered the repo rate, citing concerns about weakening demand, tighter liquidity, and emerging global risks stemming from the escalating trade tensions.   

Moody’s Analytics has echoed these concerns, trimming its growth outlook for India in 2025, attributing the downward revision to the potential fallout from the US tariff measures. Despite the temporary freeze on some tariffs, Moody’s analysts highlighted that their current forecast reflects the potential economic damage should these tariffs be fully implemented in the future.   

Earlier warnings from leading global banks, including Morgan Stanley and Nomura, had already identified India, along with Thailand, as among the economies most vulnerable to the impact of reciprocal tariffs imposed by the US on key trading partners.   

According to Aiyar, a full-scale financial meltdown may have been averted, primarily due to pressure from the bond market rather than diplomatic efforts. However, he remains convinced that a US recession is highly probable. Furthermore, he anticipates a significant economic slowdown in China, even if the country avoids negative GDP growth, effectively mirroring the impact of a recession.   

Aiyar cautioned that the simultaneous downturn in the world’s two largest economies would inevitably exert a strong downward pull on the entire global economy. The unpredictability of President Trump’s future trade actions has become an embedded factor in the global economic equation, influencing investor behavior and fostering a climate of risk aversion.   

The prevailing uncertainty surrounding US trade policy is prompting investors to prioritize safety, further dampening economic activity. As Aiyar aptly stated, the constant ambiguity of Trump’s next move is “getting baked into everything else,” leading to a cautious approach across global markets.   

In conclusion, while the bilateral trade discussions between the US and India are important, the potential for a significant economic slowdown in the United States and China presents a far more substantial risk to India’s economic prospects. The interconnected nature of the global economy dictates that a downturn in these major engines of growth would have widespread and severe consequences, dwarfing the impact of any specific tariff disputes. The prevailing uncertainty and the potential for a synchronized slowdown necessitate a cautious and adaptive approach to economic policy in India.

Deepshikha Singh is an analytical content writer who enjoys turning complex information into compelling stories. Her passion lies in uncovering insights and sharing them in a way that’s both informative and engaging.

The monetary policy committee (MPC), which has three members from the central bank and three external members, kept the repo rate (INREPO=ECI) unchanged at 6.50% in an unanimous decision. It was the third consecutive time that the committee decided to maintain rates.

India has raised rates by 250 basis points (bps) since May 2022 in a bid to cool surging prices.

The central bank, however, temporarily raised the cash buffer that banks are required to hold, which is expected to push up short-term rates in the market.

“Liquidity plays a major role with regards to inflation – both in pushing up inflation and controlling inflation,” RBI Governor Shaktikanta Das said, explaining the decision.

“While inflation has moderated, the job is still not done,” he said.

The central bank raised its inflation forecast for the current financial year to 5.4% from 5.1% earlier, citing pressures from food prices. In the July-September quarter, it now sees inflation at 6.2%, significantly higher than the 5.2% earlier forecast.

The benchmark 7.26% 2033 bond yield was trading at 7.166% as of 1:00 p.m. IST, down marginally, while the rupee was flat at 82.81 against the dollar.

The BSE Sensex (.BSESN) was down 0.26%, while the broader NSE stock index (.NSEI) was down 0.23% for the day.Reuters Graphics

The RBI maintained its policy stance of “withdrawal of accommodation” to ensure inflation progressively aligns with the committee’s target while remaining supportive of economic growth, Das said. Five of six committee members voted in favour of the stance.

Monetary policy can look through food price shocks for some time, Das said.

“We do look through idiosyncratic shocks but if it shows signs of persistence, we have to act.”

Food price spikes in India, typical at the onset of the monsoon, drove up headline inflation in June, snapping a four-month downward trend. Analysts expect inflation to have reached 6.4% in July, moving out of the RBI’s 2%-6% comfort band.Reuters Graphics

The central bank took comfort in the fact that core inflation, which excludes volatile food and energy prices, has softened.

“We believe the seasonal uptick along with erratic weather conditions will continue to keep the hawkish bias of the MPC intact in the upcoming meetings as well,” said Upasana Bhardwaj, chief economist at Kotak Mahindra Bank. “However, we expect rates to remain unchanged through the rest of the year.”

Growth in the Indian economy is seen at 6.5%, unchanged from the RBI’s previous forecast.

“Demand in the economy remains bouyant,” said Das.

The expected rise in inflation and steady growth had prompted swap markets to price in the probability of one more rate hike from the central bank.

“We doubt that further hikes will materialise,” said Capital Economics.

“But with the El Nino threat lurking … there is a growing risk that the RBI delays the (policy) loosening that we currently expect to begin in early 2024 even as other major emerging economies kick off their easing cycles,” Shilan Shah, deputy chief emerging markets economist at the research house, said in the note

The RBI has devised the e-rupee as a digital alternative to physical cash – using blockchain distributed-ledger technology.

There are 1.3 million customers and 0.3 million merchants, who are using CBDC as of June 2023, RBI Deputy Governor T Rabi Sankar said in a speech.

The central bank wants to introduce CBDC not just as a payment instrument, but as digital money and there has to be a separate strategy to get customers to use CBDC, Sankar added.

“We will have to ensure how anonymity of transactions under CBDC is maintained,” he said, adding that the CBDC’s biggest advantage will come from cross-border transactions.

The RBI had last year begun experiments on both the wholesale and retail versions of e-rupee using the blockchain distributed-ledger technology, as an alternative to cash.

Bankers had raised concerns about the project saying that in its current form, they did not see any benefits of CBDCs which was similar to internet-based banking transactions and saw Unified Payments Interface (UPI) as a tough competitor for the retail use of e-rupee.

UPI lets users transfer money between banks without disclosing account details.

However, Sankar said the central bank was not thinking of incentivising CBDC, adding that the digital currency was not competing with UPI.

Mumbai (Reuters) – A multi-pronged approach woven into a comprehensive policy intervention is needed to reignite and sustain productivity growth at emerging and developing economies (EMDEs), a deputy governor at the Reserve Bank of India (RBI) said.

Michael Patra, in a speech delivered at the Sixth Asia KLEMS Conference on Sunday, said it is widely believed that structural slowdown has been spreading across the global economy after growth peaked in 2010.

While about half of this slowdown can be attributed to demographic factors, the growth rates of investment and total factor productivity are also declining, he said.

“What is worrisome is that for EMDEs, all the drivers of growth – factor re-allocations, human capital formation, the share of working age population, and investment growth – are losing strength at the same time,” Patra said.

It is believed that east and south Asia will become the world’s centre of gravity and capital accumulation will continue to contribute more than half of GDP growth, while the rest will have to come from productivity, he added.

“The policy response has to be powered by technological capital deepening, accompanied by long-term investment in research and development to nurture a competitive innovation ecosystem,” Patra said.

“EMDEs need to leverage the potential of the services sector to drive productivity growth.”

Investing in information technology infrastructure, securing a reduction in trade costs like those associated with shipping, logistics and regulation and supportive business-enabling reforms could help to engage the private sector in partnering in this endeavour, Patra said.

Raising labour participation rates, especially among women and older workers, could also boost productivity, but this will require investments in workability, retraining and acquisition of new skills in line with changing technology.

“Central banks are stakeholders in this effort in view of their mandates of macroeconomic and financial stability,” Patra said.

“A deeper understanding of productivity trends is needed by them in order to judge the position of the economy on the business cycle so as to fashion appropriate policy responses that ensure sustained non-inflationary economic growth.”

“Effective risk management, governance, and compliance practices are essential in safeguarding the bank’s reputation, financial stability, and long-term viability,” MK Jain said in a speech at the conference of directors of state-run and private banks on May 22 and May 29, respectively.

The speech was uploaded to the central bank’s website on Wednesday.

The RBI has been urging banks to adopt effective risk management practices and strengthen their governance standards to avoid financial instability.

Earlier this week, RBI Governor Shaktikanta Das, had flagged that it was a matter of concern that the central bank has come across gaps in governance at certain banks, which could lead to some volatility in the sector.

Effective governance requires a competent and independent board that oversees the management by asking pertinent questions and formulating appropriate strategies while keeping in mind the risk appetite, Jain said.

The deputy governor also sought banks to ensure that their actions comply with the intended purpose and principles of regulation and not just stick to the literal or technical interpretation.

Lenders should also take a long-term view of their business and consider the impact of decisions on their financial health, reputation, and broader societal and environmental factors, the deputy governor said.

Boards must remain vigilant, adaptive, and continuously assess the bank’s performance, risks, and opportunities, and take timely and informed decisions, he added.