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RBI Governor warns stalled India-US trade deal may hurt economy

By CAShorts DeskPublished Updated Sources: The Hindu; RBI; The White House; Reuters; Telangana Today; PTI; The Bridge Chronicle; Deccan Chronicle; The Wire; Outlook Business

RBI Governor warns stalled India-US trade deal may hurt economy
Illustration (AI-generated)

RBI Governor Sanjay Malhotra said on Wednesday that failure to conclude an India-US trade deal could hurt the economy, though recent trade pacts and export diversification would soften any fresh US tariffs. His remarks follow Finance Minister Nirmala Sitharaman's comment that talks have hit a plateau, while a new US law permits tariffs of up to 100%.

Syllabus: GS3 · Indian Economy & Growth; Prelims · Current Affairs & IR; GS2 · Groupings & Agreements

Why it matters

The United States is India's biggest export market, buying $42.79 billion of Indian goods in April-August 2026. Fresh US tariffs would make those goods dearer for American buyers, which could hurt exporters, their workers and overall growth. The Governor's point is that the damage can be cushioned, because export diversification and new trade pacts give Indian firms other buyers. Oil is the harder problem. The new US law ties tariffs to buying Russian oil, yet Russia supplied about half of India's oil imports in July after Gulf supplies through Hormuz were disrupted. Cutting those purchases could raise fuel prices; keeping them could cost exports. Meanwhile the RBI's rate rise will make loans dearer only slowly, as banks pass it on over several quarters.

Prelims pointers

  • The MPC, constituted under Section 45ZB of the RBI Act, 1934, has six members: three from the RBI, with the Governor as chair, and three appointed by the Central Government.
  • The repo rate is the RBI's rate for providing liquidity to banks under the Liquidity Adjustment Facility against government and other approved securities; 25 basis points equal 0.25 percentage point.
  • After the October 2026 hike, the Standing Deposit Facility rate is 5.25%, and the Marginal Standing Facility rate and the Bank Rate are 5.75%.
  • Under the RBI's new stance of calibrated tightening, rate cuts are off the table in the near term: the next move can only be a hike or a pause.
  • In March 2026 the Office of the US Trade Representative opened two Section 301 probes covering India: one on forced labour, the other on excess industrial capacity.
  • DGFT Notification No. 23/2026-27 of 13 July 2026 amended the Foreign Trade Policy to prohibit imports of goods made wholly or partly with forced labour.
  • At the G20 Trade Ministers' Meeting in Milwaukee, Piyush Goyal said India has no structural excess capacity in the sectors identified by the G20 Presidency.
  • The Strait of Hormuz, between Iran and Oman, links the Persian Gulf with the Gulf of Oman and the Arabian Sea.

Practise a UPSC-style question

With reference to the repo rate, consider the following statements:

1. It is the rate at which the RBI lends short-term funds to banks against government securities.

2. A 25-basis-point increase in it equals a rise of 2.5 percentage points.

3. An increase in it tends to lower the interest rates banks charge on loans.

Which of the statements given above is/are correct?

  1. (a) 1 only
  2. (b) 2 only
  3. (c) 3 only
  4. (d) 1, 2 and 3
Show the answer

Answer: (a) 1 only

1 is correct: the repo rate is what the RBI charges banks for short-term funds against government securities. 2 is incorrect: a basis point is 0.01 percentage point, so 25 basis points equal 0.25 percentage point. 3 is incorrect: a higher repo rate raises banks' cost of funds and so tends to push lending rates up.

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