Strong domestic fundamentals to cushion FDI despite US tariff headwinds: BoB Economist

New Delhi [India], August 7 : Despite the fresh headwinds from elevated US tariffs, India's strong domestic economic fundamentals are expected to support foreign direct investments (FDI) in the country, according to Sonal Badhan, Economics Specialist at Bank of Baroda.

In an exclusive conversation with ANI, Badhan said that while the recent tariff developments between the US and India could impact export-oriented sectors, overall investor sentiment, particularly foreign portfolio investments (FPI) and FDI (Foreign Direct Investment), is likely to remain stable due to strong domestic consumption trends.

"We expect limited impact on FPI and FDI inflows. This will be mainly limited to export-oriented companies/sectors. Since domestic fundamentals remain strong so far, domestic consumption-oriented sectors will be better off," she explained.

When asked whether the rising tariffs could pose medium-term risks to India's macroeconomic indicators like the current account or fiscal deficit, Badhan pointed out that India's services exports, which remain outside the scope of tariffs, will help cushion the current account deficit (CAD).

"Impact on current account deficit will be cushioned by our services exports, which remain beyond the reach of tariffs so far. International oil prices are also low, which will further help CAD to remain range bound.," she noted.

On the fiscal side, Badhan highlighted that if the government were to introduce stimulus measures to boost domestic consumption in response to prolonged trade tensions, there could be an impact on the fiscal deficit ratio.

"This is likely to kick in case US and India fail to reach a trade deal. The probability of which is slim for now," she added.

On the monetary policy, Badhan said that while the Reserve Bank of India (RBI) has currently paused rate cuts, any further escalation in trade tensions, especially if significant tariffs are imposed on pharma or semiconductor imports by the US, may lead to a downward revision of RBI's growth projections.

"Depending upon the evolving situation and more evidence on its impact on economy, RBI may opt for another 25bps policy rate cut in Oct/Dec'25," she said.

On the potential impact on GDP growth for FY26, Badhan said the bank had initially estimated a 0.2 per cent impact. However, depending on the final tariff rates imposed by the U.S., the impact could range between 0.2 per cent to 0.4 per cent.

"Depending upon what would be the final rates applied by the US on Indian imports, the impact on GDP growth could range between 0.2-0.4 per cent. The impact on GDP could be less than 0.2 per cent also if the final tariff rates fall below 25 per cent," she added.

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