RBI Flags U.S. Trade Tensions as Key Risk Despite Benign Inflation Outlook

The Reserve Bank of India (RBI) has warned that persisting trade uncertainties with the United States remain a downside risk for growth, even as domestic conditions appear supportive and inflation trends turn more favourable. The observations were published in the central bank’s August monthly bulletin released on Thursday.

Trade Tensions Weigh on Outlook

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Indian exports to the U.S. have come under fresh pressure after President Donald Trump’s additional 25% penalty for purchasing Russian oil took effect on August 27, effectively raising tariffs on Indian goods to 50%. This tariff burden, combined with earlier reciprocal duties, has created fresh headwinds for India’s trade prospects. The RBI highlighted that evolving trade policies between the two nations could continue to weigh on external demand and act as a drag on overall growth.

Domestic Conditions Remain Resilient

Despite the external challenges, the RBI said the Indian economy remains resilient, supported by improving rural demand. Favourable rainfall and temperature conditions are expected to aid the kharif season, while rising real rural wages could strengthen consumption in the second half of the fiscal year.

The bulletin added that accommodative financial conditions, the ongoing transmission of previous rate cuts, supportive fiscal measures, and improving household confidence should together help sustain aggregate demand.

Inflation Outlook Turns Softer

Headline inflation is projected to remain significantly below the 4% target for much of the financial year. The RBI noted that muted food prices, aided by a favourable base effect, will likely push inflation further down in the second quarter before gradually rising in the final months of the fiscal.

“Inflation outlook for the near term has become more benign than anticipated earlier,” the bulletin stated. The central bank expects average inflation for the full year to remain comfortably under the target.

Policy Stance Unchanged, but Watchful

Earlier this month, the RBI held its key policy rate steady at 5.50%, citing steady domestic growth conditions. However, the minutes of the latest monetary policy committee meeting flagged global trade tensions and tariffs as potential drags on growth momentum.

The bulletin reiterated that monetary policy would continue to monitor both domestic growth-inflation dynamics and external risks closely before deciding the future course of action.

Conclusion

The RBI’s bulletin presents a balanced outlook: resilient domestic demand, a favourable inflation trajectory, and policy support offer stability, while trade frictions with the U.S. remain the most significant external risk. For investors and businesses, the message is clear—while inflation and demand conditions are supportive, global uncertainties could still test India’s growth resilience in the months ahead.