India's large domestic economy and low dependence on exports well-positioned to deal with US tariffs: Moody's
India is well-positioned to deal with the negative effects of US tariffs and global trade disruptions due to its large domestic economy and low dependence on exports, Moody’s Ratings said in its ‘Emerging Markets – India’ report on Wednesday, May 21.
Moody’s has a Baa3 stable rating on India. The ratings agency said the Indian government initiatives to boost private consumption, expand manufacturing capacity and increase infrastructure spending will help offset the weakening outlook for global demand.
It added that easing inflation offers the potential for interest rate cuts to further support the economy, even as the banking sector’s liquidity facilitates lending.
India’s retail inflation eased to 3.16% in April 2025, marking the lowest year-on-year rate since July 2019. Wholesale inflation in April also slowed to a 13-month low at 0.85% year-on-year, compared to 2.05% in March.
Last month, the Reserve Bank of India (RBI) cut its benchmark repo rate by 25 basis points for the second time in a row, after reducing its rate for the first time in five years back in February. The repo rate now stands at 6% from the previous 6.25%. The central bank also changed its stance to “accommodative” from its earlier “neutral” stance.
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Moody’s said that the recent India-Pakistan tensions, “including the flare-up earlier in May, would weigh on Pakistan’s growth more than on India’s.
Here are highlights from the report:
Domestic demand underpins growth despite risks from US policy shifts.
The Centre’s infrastructure spending supports the country’s GDP growth, while personal income tax cuts bolster consumption, Moody’s said. India has a limited reliance on the trade of good and its robust service sector are mitigants to US tariffs.
India-made goods may even benefit from increased US demand if trade talks lead to lower tariffs on India compared to other emerging markets. “Despite global volatility, India’s sound banking market and stable credit conditions underscore its economic strength. Still, a deterioration in global economic and credit conditions would have knock-on effects,” the report stated.
Robust infrastructure demand propels investment growth.
The ratings agency said the strong demand for segments such as power, transportation and digital infrastructure will continue to attract significant capital investments over the next five to seven years.
Also, the effects of US tariffs would likely be muted for most infrastructure sub-sectors as they mostly cater to domestic demand and benefit from supportive regulatory or contractual arrangements.
“Ports are more exposed to earnings decline among infrastructure segments, but Indian ports are less susceptible because they mainly serve domestic requirements,” the report stated.
Homegrown demand shields non-financial companies against tariffs.
Infrastructure development and favourable demographics will underpin the businesses of India’s non-financial companies, Moody’s said. Significant government investments will boost sectors such as mining, construction and manufacturing, while urbanisation and a young population will fuel demand for housing and consumer goods, it said. “However, sectors with exports, like automotives, are exposed to global trade challenges, despite diversified operations,” the report stated.
Banking sector poised to weather potential turbulence.
Moody’s said healthy profitability and strong capitalisation drive the credit strength of Indian banks.
Rate cuts will constrain banks’ interest margin, but non-interest income will be bolstered by business volumes and bond gains. “The Central bank’s proactive steps to limit risky loan growth ensure financial stability, as inflation aligns with targets. While loan growth will be slow, stable funding and liquidity will support banks’ credit profiles,” the report added.
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