India-US Bilateral Trade Agreement Prospects
The approach to a mutually beneficial bilateral trade agreement between India and the United States is marked by uncertainty as the July 9 deadline approaches. The US's policy approach has disrupted global trade and affected financial markets.
Impact on Global Financial Markets
- The US dollar has depreciated over 10% against a basket of currencies in the first half of 2025.
- Geopolitical tensions are escalating, increasing external risks.
Reserve Bank of India's Financial Stability Report (FSR)
The FSR indicates that heightened trade disruptions and geopolitical tensions could negatively impact India's domestic growth outlook, leading to increased risk aversion among investors and potential corrections in domestic equity markets.
Channels of Impact on the Indian Economy
- The nature of the trade deal with the US, its arrangements with other partners, and India's competitors will affect Indian tradable sectors and growth outlook.
- India's investment landscape will be influenced by US fiscal policies and global capital flows.
Current Account and Capital Flows
- India recorded a current account deficit (CAD) of 0.6% of GDP in 2024-25.
- Net capital flows were insufficient to cover the CAD, leading to a depletion of foreign-exchange reserves.
- In the event of extreme adverse shocks, foreign portfolio outflows could reach 6% of GDP, as per RBI's framework.
Domestic Economic and Financial Conditions
Despite global challenges, domestic conditions are providing comfort:
- Inflation is expected to stay near target, enabling the RBI to implement policy-rate cuts.
- An above-normal monsoon is set to boost agricultural production.
- Ongoing fiscal consolidation is anticipated to progress.
- Corporate and bank balance sheets are improving, with a declining debt-to-equity ratio.
- The corporate debt-to-GDP ratio is 51.1%, lower than many emerging and advanced economies.
- Gross NPAs among scheduled commercial banks fell from 9.6% in March 2017 to 2.3% in March 2025.
- Fundraising from the capital market grew by 32.9% in 2024-25.
Overall, while corporate balance sheets and domestic financial markets are robust, investment revival, crucial for growth, may be hampered by external uncertainties.