India’s growth engine, once roaring on the back of resilient domestic demand and a strong services sector, is now confronting a sudden jolt from across the Pacific. The United States, in a dramatic shift in its trade posture, has slapped hefty new tariffs—26% on a wide range of Indian exports. The ripple effect is already visible: a tangible slowdown looms, and economists are recalibrating forecasts with cautious eyes.

This tariff move, part of the U.S. administration’s broader strategy to recalibrate global trade balances and protect domestic manufacturing, has put India in a precarious spot. Analysts estimate that these trade barriers could shave off 20 to 40 basis points from India's GDP growth in FY26, potentially dragging it down from the Reserve Bank of India’s (RBI) optimistic 6.7% projection to somewhere between 6.3% and 6.5%. For a country that recently regained its status as the world's fastest-growing major economy, the timing couldn't be worse.

Sensing the urgency of the moment, attention now turns to the RBI, which is likely to pull the monetary lever once again. Having already cut rates by 25 basis points in February 2025—bringing the policy repo rate to 6.25%—market watchers expect the central bank to go further. Some forecasts, notably from Citigroup, now anticipate up to three additional rate cuts of 25 basis points each this year, bringing the rate down to 5.5%—a level not seen since mid-2022. The rationale is simple: if external headwinds dampen export-led growth, the domestic engine needs reigniting.

Meanwhile, the foreign exchange market has added another twist. The U.S. dollar, traditionally a safe haven, is wobbling amid global concerns over inflationary risks linked to the new trade restrictions. This wobble has unexpectedly benefited the Indian rupee, which rallied to 85.28 against the dollar—a notable appreciation that may help offset some of the import-related inflation.

While the long-term implications are still unfolding, this episode marks a stark reminder of the global economy’s interlinked nature. For India, a country striving to establish itself as a manufacturing and export powerhouse under initiatives like ‘Make in India,’ the challenge is twofold: navigating global trade headwinds while keeping the domestic demand flame alive. As policy corridors buzz and rate-cut expectations mount, one thing is clear—2025 will be a year of delicate balancing acts for Asia’s third-largest economy.