Trump tariff blow set to ripple through India's economy and banks: Fitch's CreditSights
CreditSights
. While the direct export exposure to the US is modest, the higher trade barriers are expected to ripple through sectors where America is a dominant market, and banks could also see an indirect drag on credit growth.
The Trump administration last Wednesday imposed an additional 25% tariff on Indian exports to the US, in retaliation for New Delhi's continued imports of Russian crude oil. This new measure will come into force on August 27 and will push the overall tariff rate to 50%, as it is added on top of an existing 25% levy. CreditSights said this would make India subject to the highest US tariff rate currently in effect, a position shared only with Brazil.
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CreditSights described the overall blow to the economy as 'manageable' given that exports to the US make up roughly 2% of India's GDP, and that domestic private consumption and capital investment remain the main growth drivers. It cited BMI, its sister company, which is projecting GDP growth of 6.0% in FY26 and 5.6% in FY27 under the present 25% tariff rate. If the full 50% rate takes effect, BMI expects GDP growth to fall by a further 0.2 percentage points in FY26 and 0.4 percentage points in FY27. The research firm also said there is still a possibility of negotiations that could bring the tariff rate down, noting that other countries have seen such outcomes in the past.
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However, a prolonged 50% tariff regime could inflict severe damage on industries heavily dependent on US demand. CreditSights highlighted textiles, jewellery, apparel, seafood, machinery and mechanical appliances, chemicals, and auto components as sectors likely to face significant headwinds. In each of these areas, the US is the largest export market for Indian producers, and the higher duties could erode competitiveness and squeeze margins.
For Indian banks, the direct risk from these sectors appears limited. CreditSights' analysis of financial data as of June 30, 2025, shows that the combined outstanding fund-based and non-fund-based exposure of the banks under its coverage to these industries is below 10% of total exposure. Furthermore, some of the most exposed product categories — such as auto parts, seafood, and machinery and mechanical appliances — are sub-segments of broader categories like vehicles, food, and engineering, where the banks' exposure is more diversified.
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Nevertheless, the impact on banks may be felt more through what CreditSights called 'second order' effects. The firm expects credit costs to rise, even if asset quality remains broadly manageable. It warned that the bigger issue could be a slowdown in corporate loan demand, which was already weak in the first quarter of FY26, and a dent in investor sentiment towards future investments in India. Both trends could restrain credit growth and weigh on banks' earnings outlook.
With less than two weeks before the higher tariffs are set to take effect, the potential for last-minute talks offers some hope to exporters and investors. But if the measures stand, sectors with deep reliance on US buyers will need to navigate a difficult adjustment, and banks may find themselves grappling with a slower pipeline of new lending, even as the broader economy continues to lean on domestic consumption and investment to drive growth.
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