Trump Tariff's and Inflation (Part 2)
India's Economic Landscape: S&P Rating Upgrade and Geopolitical Shifts
S&P Global Lifts India's Sovereign Rating
S&P Global has upgraded India's sovereign rating from BBB− to BBB with a Stable Outlook, marking the first such upgrade in 18 years. This upgrade is seen as a resounding vote of confidence in India's economic policy, reforms, and resilience. S&P Global attributes this to India's buoyant economic growth, alongside an enhanced monetary policy environment that effectively manages inflationary expectations.
Key Implications and Outcomes of the Upgrade:
Signifies Robust Macro Fundamentals: The upgrade signals India's robust macro fundamentals, highlighting its leadership among large emerging markets in growth and stability. It acknowledges determined fiscal consolidation and a strong, independent monetary policy. Furthermore, it endorses India's external strength, characterised by healthy forex reserves and lower current account risks.
Boosts Investor Confidence: India is expected to become a global magnet for investors, leading to heightened appeal for institutional investors and increased visibility in global indices and emerging market portfolios. A surge in sustainable Foreign Direct Investment (FDI) and foreign portfolio inflows into both equity and fixed income is anticipated. India recorded $81.04 billion in FDI in FY 2024-25, a 14% increase from the previous year. RBI Governor Shaktikanta Das noted in July 2024 that the upgrade should have occurred earlier, given India's solid macroeconomic fundamentals and robust growth momentum.
Drops Borrowing Costs: The upgrade can lead to significant drop in borrowing costs. Immediately after the announcement India’s 10-year government bond yield fell 8-10 basis points to 6.40%, marking the biggest drop in two months. JP Morgan's Kaustubh Kulkarni stated that the upgrade reinforces confidence in India's sound economic fundamentals and growth, and is expected to improve borrowing costs for quasi-sovereign organisations and corporates.
Strengthens Currency & External Sector Resilience: Agan after the announcement Indian Rupee strengthened to ₹87.53/USD (session high) from ₹87.67 pre-upgrade, and S&P raised India's transfer & convertibility rating to A−, signalling robust external solvency.
Positive Ripple for Banks & NBFCs: The S&P upgrade has cascaded to seven top banks and three key Non-Banking Financial Companies (NBFCs), firming up India's financial backbone. Reforms like the Insolvency & Bankruptcy Code (IBC) strengthen credit culture, asset recovery, and risk containment, resulting in reduced systemic risk and greater credit flow to businesses and consumers. Notably, SBI, HDFC Bank, and eight other financial institutions benefited from this sovereign action.
Validates Policy & Reform Momentum: The upgrade validates India's fiscal discipline, capital expenditure (capex)-led economic development (3.1% of GDP), and broader reform agenda. It encourages lawmakers to sustain debt-to-GDP improvement and policy predictability, setting the stage for even higher ratings if momentum continues. S&P projects India's GDP growth at 6.5% in FY26 with continued momentum over the next three years, and the debt-to-GDP ratio expected to decline to 78% by FY2029 from 83% in FY2025.
Resilience Amid Global Storms: India is seen as a safe harbour for growth due to its domestic demand, which accounts for over 60% of GDP. This shields India from export/tariff shocks, making external risks "manageable" according to S&P. Even with 50% US tariffs, India's home-driven growth and prudent policy reduce vulnerability, boosting its "decoupling" narrative from global volatility.
Overall, S&P's upgrade is perceived as both a validation and a launchpad, positioning India as investment-grade and future-ready.
US Tariffs: Unifying BRICS and Shifting India's Trust
The imposition of tariffs by the United States on India, particularly a 25% penalty tariff and a "whopping 50% tariffs" including 25% sanctions related to India's continued import of Russian oil, has been described as a "stupidest tactical move" of US foreign policy.
Criticisms of US Policy and Impact on India-US Relations:
Jeffrey Sachs argues that the unilateral US measures are "unconstitutional" (as tariff responsibility lies with Congress) and "illegal under international law", asserting that the US should not dictate India's trade partners.
The US is perceived as being in a "defensive mode" and "flailing around" to maintain global dominance, rather than implementing sound economic policy.
The relationship between India and the US has been "fairly troubled," and the tariffs have taught India a critical lesson: "You cannot trust the United States". Sachs has advised India to build a "diversified base of partners" instead of relying on the US.
The US ambition for India to replace China in supply chains is considered "unrealistic" given US protectionism. The US will also have to practically accept India's reliance on Russian weaponry like S-400 missile systems due to the emerging multipolar world.
Unifying Effect on BRICS Nations:
The US tariffs have "overnight unify[ed] the BRICS countries as never before". Following the tariff announcement, there was a "flurry of calls" among the leaders of Brazil, Russia, India, China, and South Africa. Donald Trump is sarcastically credited as the "great unifier of the bricks" for simultaneously attacking these nations.
India's Diversification Strategy and Rupee-Rouble Trade:
In response to global trade developments and US tariffs, India has actively pursued economic diversification, particularly strengthening ties with Russia and exploring closer relations with China.
RBI's Role in Rupee-Rouble Settlements: The Reserve Bank of India (RBI) has simplified and accelerated trade settlements in rupees with Russia.
On August 5, the RBI allowed banks to open special rupee vostro accounts (SRVAs) for foreign correspondent banks without prior approval.
On August 12, the RBI further relaxed rules, permitting funds in SRVAs to be invested freely in Indian government securities and treasury bills.
SRVAs facilitate oil trade by enabling transactions to be settled directly in rupees, bypassing the US dollar and reducing currency conversion costs, exchange rate risks, and payment delays.
Challenges in Rupee-Rouble Settlements: India's trade deficit with Russia (driven by oil imports) leads to an accumulation of rupees with Russian exporters. Many Russian firms still prefer dollar payments, and the rouble's volatility and Western sanctions (restricting SWIFT access) pose operational hurdles.
Addressing Challenges: The RBI and government are developing a dynamic rupee-rouble exchange mechanism and exploring alternative financial messaging networks. Russian entities are allowed to invest surplus rupee balances from SRVAs in Indian government securities, bonds, equity, and infrastructure projects. Proposals also include using rupee balances for third-country exports, allowing Russian suppliers to purchase Indian goods while receiving payments in other currencies, with trilateral settlement mechanisms involving the UAE are also under discussion.
The India-China-Russia Strategic Triad: A $54 Trillion Global Powerhouse
A strategic triad can form between India, China, and Russia. Trump's tariffs may inadvertently strengthen this alliance as countries seek to reduce reliance on the US dollar and foster a multipolar world order. Experts note that Trump's tariffs have had little effect on the global merchandise trade in a multipolar economy, but are forcing a geopolitical realignment.
Top 5 Reasons for This Trinity:
Strength in Unity: This trinity commands $53.9 trillion in GDP (PPP), nearly one-third of the planet's economic output, uniting three major powers. Trump's tariffs seem to have acted as a binding force for these nations.
Dominance in Export: Together, India, China, and Russia export $5.09 trillion, almost one-fifth of global merchandise exports. They hold $4.7 trillion in foreign reserves (38% of the world's safety net) and comprise 3.1 billion citizens (37.8% of the total population), forming the largest consumer market.
Over-Dependence on the US Dollar: The US administration's tariffs are aimed at maintaining the status quo of US dollar dominance. India and China's purchase of Russian crude in local currency after US/European sanctions on Russia helped them accumulate more dollars, aiding in a "currency war".
Hit on US Dominance in Defence Deals: Trump's tariffs also aim to maintain US dominance in global defence deals, pressuring trade partners to execute defence deals with the US or NATO countries, thereby alienating Russia, China, and India from the global defence market. The trinity's combined military spending is $549 billion (20.2% of the world's defence budget), and they account for 35% of global energy consumption.
Renaissance of Partnership in Global Order: Russia can provide cheaper oil and energy, China is a manufacturing hub, and India is a service hub, making their combination natural. Trump's tariffs have created an environment where New Delhi and Beijing are seeking avenues for export business lost due to these tariffs.
The convergence embodies the emergence of a new world order where Eurasian powers shape global trade flows. This trinity may also help India to bargain with Beijing on its Belt and Road Initiative (BRI), especially as China's exports are squeezed by rising tariffs and companies shift supply chains to India and other countries.
Disclaimer “I am the Co-Founder and Fund Manager of ABHI Incubation Fund an Asset Management Company currently managing ABHI Incubation Angel Fund SEBI registration IN/AIF/24-25/1514). I am NISM -XIX-D-Category I and II Alternative Investment Fund Manager Certified. Registration No. NISM-201800164903. The content shared here is for informational and educational purposes only. It should not be considered financial, investment, legal, or professional advice. Readers are encouraged to consult a qualified expert before making any decisions or taking action based on this content.