India exposed to trade war risk; here is how

Weak macroeconomic indicators like current account deficit and inflation have exposed India to adverse global macro developments such as US monetary policy trajectory and trade war risks, says a report. According to Singapore's banking group DBS, while India's foreign reserves are at a record high, just as growth gathers momentum, optimism has been dented by widening current account deficit, pushing back of fiscal consolidation goals and inflation expected to remain above target next year. The report authored by DBS economist (Eurozone and India) Radhika Rao further noted that any escalation in trade tensions involving the US might aggravate India's current account concerns. "In the immediate term, sentiment and the rupee remain susceptible to US monetary policy trajectory and trade war concerns," the report said.

India's current account deficit widened to USD 13.5 billion or 2 per cent of GDP in the December quarter last year, up from USD 8 billion or 1.4 per cent of GDP in the year-ago period. "External funding needs have risen, which tends to increase dependency on global risk sentiment. Our observations in this note show that there are limited near-term systemic risks, but developments warrant attention," it added. In recent weeks, the US has raised concerns over the import duties imposed by the Indian government in its recent budget, also challenging its export subsidies at the World Trade Organization.

As a result, India remains on the list of countries that will face higher tariffs on its imports of steel and aluminium to the US. DBS, however, noted that material impact on India's trade might be limited as the US accounts of about 10 per cent of the country's iron, steel, and aluminium exports.
"Repercussions might be wider if more blanket tariffs are imposed by the US in coming weeks," it said.