In an interview with CNBC-TV18, he further mentioned that domestic factors, including fiscal and monetary policy measures, would support growth. The government’s push for higher capital expenditure and expectations of liquidity injection and rate cuts by the Reserve Bank of India (RBI) are likely to boost economic activity.
Below is the verbatim transcript of the interview.
Q: Contrary to fears, US President Trump did not announce tariffs on day one of his presidency, but he did threaten tariffs on Mexico, Canada, and even Europe. He also threatened a possible universal tariff. What does all this mean for the dollar, inflation, and Federal Reserve action, and how will this impact Asia and India? So, from the lack of any concrete announcements on day one, should we assume it will be a slow grind-up in terms of tariffs, nothing big and immediate?
A: Before the inauguration speech, this was the message we had, and essentially, this came from our head of US public policy, who said that you would hear the announcements quickly, but the implementation of tariffs would be slow. What we heard from the President seemed pretty much in line with the expectations our team had.
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Q: If it is a slow, phased approach, how would you expect Asia to be impacted in 2025, including India?
A: Right now, what we have assumed is that tariffs will be largely focused on China within the region. For China, we are assuming that the weighted average tariff will rise from the current 10.5% to 25.5% by the end of 2025. This increase will begin in the second quarter of 2025 and we expect another 10% weighted average increase in 2026, ultimately taking the figure to 36% by the end of 2026. That is the path we are looking at. With this, we believe that the impact will be much more muted compared to what we saw in 2018-19.
The critical assumption we are making is that there will not be universal tariffs, and there will not be tariffs on all the countries in the region. If that were to happen, the impact on corporate confidence would be much greater than what we are assuming in our base case. That’s the broad summary.
In terms of growth implications, we currently have regional growth forecast to decline from 4.5% to 4.1% in 2025. A large part of this is due to tariffs and the negative impact on the region caused by trade tensions.
Q: But this does not take into account the possibility of universal tariffs and a steep fall in business confidence?
A: That is the risk scenario. We are seeing two risk scenarios, effectively: one where there is a universal tariff and the other where it is not a universal tariff, but the bilateral disputes are so numerous that they effectively have the same impact on corporate confidence as a universal tariff would.
Q: The fear is that higher tariffed goods imports into the US will lead to higher inflation and therefore, possibly no cuts from the Fed. What are your thoughts on the Fed and inflation in the US?
A: Right now, in our base case, we are expecting inflation to ease slightly, and therefore we are forecasting the Fed to cut rates twice in 2025. However, the US team has been emphasising that if tariff and immigration policies create upside risks for US inflation, the Fed will need to adjust its course accordingly. But just focusing on the tariff impact on inflation, I would also like to highlight another important factor: the behaviour of the currency will be crucial, as it will have final implications for the inflation outlook.
In 2018-19, the US-weighted average tariff rose by 2.7%, but the trade-weighted dollar appreciated by 10.3%. So, if you look at the facts, US core goods inflation declined, and the US import price index fell after tariffs were imposed on China. This will be another key variable to monitor in terms of currency dynamics.
Q: What is your currency expert telling you? We have already seen the yuan appreciate after the lack of any announcement; from 7.3 it has come down to 7.27. How much does your team expect the yuan to depreciate, and therefore, how much might the rupee depreciate?
A: At this point, our base case is that tariffs on China will increase. Right now, of course, there is no clear indication of when those tariffs will be raised. But in our base case, assuming the tariff path I mentioned earlier, we expect the yuan to depreciate to 7.6 by the end of 2025. This would likely be the fate for other currencies in the region as well, given China’s significant role in the regional economy. It has extensive trade relationships with many countries in the region, so we expect the entire group of currencies to see some depreciation.
The Indian rupee (INR) will experience less depreciation than the Chinese yuan (CNY), but it will still depreciate somewhat in sympathy with the yuan.
Q: On India, do you still stick to that 6.5% growth forecast you provided earlier this month? Or do you think both global headwinds and an Indian slowdown in consumption could lead to less growth in 2025 than you previously estimated?
A: Our base case assumes that there are no aggressive universal tariffs across the region. In that scenario, you would probably not see a significant impact on global corporate confidence, global growth, or global trade. This means there is some downside risk for India from the external environment due to tariff increases on China. However, because there are no broader trade tensions, this will prevent the external environment from being as challenging for India as it was in 2018-19. With that assumption, we believe India can still achieve its 6.5% GDP growth.
While we are talking about trade tensions and their implications for goods and exports for India, services exports have accelerated quite nicely and have become meaningful in size. On an annualised basis, they are about $375 billion, and these exports are growing at an average rate of about 15% over the last three months, which is much higher than it used to be. So, in the last three months, we’ve seen a significant acceleration in service exports. This is one of the factors making us feel that the external environment may not be as challenging for India as it might seem.
Additionally, we are expecting fiscal easing, with government capital expenditure picking up. We also anticipate that the RBI will ease monetary policy by injecting liquidity and cutting rates.
So, these three factors—services exports, fiscal easing, and monetary easing—make us confident that the 6.5% GDP growth target for India is still achievable.
more to come…
For the entire interview, watch the accompanying video