US President Donald Trump’s decision to impose a 26% reciprocal tariff on Indian imports poses a downside risk of 30–60 basis points to India’s FY26 growth projection of 6.5%, according to an analysis by Morgan Stanley. The impact is expected to stem from both direct and indirect channels.
The United States’ decision to impose a 26% reciprocal tariff on Indian imports, announced by President Donald Trump, is likely to cast a shadow over India’s growth trajectory for FY26. In a recent analysis, global financial firm Morgan Stanley warned that this move brings with it a downside risk of 30 to 60 basis points (bps) to its current growth estimate of 6.5% for the fiscal year.
The clarification from the US government confirmed that the reciprocal tariff—effective April 9—would stand at 26%, slightly lower than the previously reported figure of 27%. President Trump justified the rate by noting it was half of the total trade-weighted tariff India applies on US goods, which he estimated at 52% when accounting for both tariff and non-tariff barriers, and currency adjustments. The decision is part of a broader tariff strategy in which a minimum levy of 10% has been imposed on all trading partners, with exceptions made for certain sectors such as energy and pharmaceuticals. Notably, automobiles will face a uniform 25 % tariff across the board.
While the direct effect of these tariffs on India may appear limited—thanks to the exemption of key sectors like energy and pharmaceuticals—the broader economic implications could be more profound. According to Morgan Stanley, India’s goods exports to the US currently stand at about 2.1% of GDP. When energy and pharmaceutical exports (which are not subject to the new tariffs) are excluded, the figure drops to 1.7% of GDP.
“While the tariffs exceed our estimates for India, on a relative basis, they are at par or even lower than those imposed on some of our key competitors,” said Upasana Chachra, Chief India Economist at Morgan Stanley. “However, a slowdown in US growth and weak global trade momentum could significantly impact India’s external demand.”
The more pressing concern, as highlighted by the report, lies in the indirect consequences. The heightened uncertainty triggered by these tariffs is expected to undermine corporate confidence, thereby weakening the risk appetite among businesses. This would likely result in further delays in private capital expenditure (capex), which is already on a slow recovery path.
“As such, we see downside risk of 30-60bps to our growth estimate of 6.5% for FY26,” Chachra emphasized, adding that the outcome of ongoing trade negotiations with the US will be crucial. If a trade agreement is implemented by the fall of 2025, it could help cushion some of the adverse impacts stemming from the higher tariffs.
In light of these developments, Morgan Stanley expects India’s monetary policy to take a more supportive turn. The Reserve Bank of India (RBI), which is set to review policy on April 9, is anticipated to shift its stance to “accommodative” and implement a 25 basis point rate cut. This would be aimed at cushioning the domestic economy against rising external headwinds.
“Given the downside risks to growth, we also see the possibility of a deeper rate easing cycle. This could involve additional rate cuts in the range of 50-75bps, compared to our base case scenario of a 75bps total cut,” Chachra noted.
Additionally, the report predicts that policymakers may temporarily pause the fiscal consolidation path to ensure sufficient support for domestic demand. This would likely be done through increased public capex, a tool often used by the government to stimulate growth during uncertain global conditions.
The coming months will be critical in determining how India manages to balance its external challenges with internal economic stability. While the tariff hike presents short-term headwinds, the eventual outcome of trade talks and the government’s fiscal and monetary responses will shape the country’s medium-term growth prospects.
For now, businesses and policymakers alike will be watching both Washington and New Delhi closely, as the two nations navigate yet another chapter in their evolving trade relationship.
