India’s trade deals will matter more than ever amid uncertainties - Deloitte

KUALA LUMPUR, 23 JULY 2026 —

Dr. Rumki Majumdar is a Director and economist with Deloitte India. She writes on several contemporary economic and sector-specific issues related to India with a focus on policy implications on industries such as consumer, financial services, energy and resources, technology, and public services. She has also written on numerous economic issues about the United States and several emerging economies for Deloitte Insights in the past.

India’s macroeconomic outlook seemed relatively favorable at the start of 2026: Inflation had moderated to 2.1%, its lowest level in years; the Reserve Bank of India (RBI) was contemplating further monetary easing; relief from higher US tariffs and supply-chain uncertainties had boosted investor confidence; and domestic demand and resilient growth prompted the RBI governor to describe India’s economic position as a “Goldilocks” phase.

The geopolitical arena has since become more complicated, with the Middle East conflict serving as the latest reminder that geopolitical tensions pose a key risk to global economic stability. The hostilities underscored the fragility of the RBI’s macroeconomic assumptions, leading it to downgrade its growth projections and raise its inflation expectations, as higher energy prices and trade disruptions due to the blockade of the Strait of Hormuz trickle into the economy.

While the memorandum of understanding signed by the United States and Iran did reduce immediate concerns, structural vulnerabilities associated with an increasingly uncertain geopolitical environment persist. Despite entering the 2026 from a position of relative macroeconomic resilience, India now faces major global headwinds. Deloitte now expects a modest growth rate of 6.5% to 6.8% this fiscal.

But these must be complemented by conducive industrial policy and an enabling ecosystem that can drive domestic value addition and progressively reduce India’s import dependence, given many of India’s strategic manufacturing sectors continue to rely heavily on imported inputs. The right industrial policy reforms can help the economy to integrate more effectively into global value chains while lowering its vulnerability to geopolitical and supply-chain disruptions.

In the last fiscal, 1 real gross domestic product growth stood at 7.7% year over year (figure 1), beating the government’s first advance estimate (7.4%). 2 Growth remained in the final quarter (7.8%), indicating resilient domestic demand amid a challenging global backdrop. Real gross value added (GVA) expanded even faster (7.9%), pointing to strength on both demand and supply sides. The expenditure side of GDP was largely driven by domestic demand.

India’s merchandise trade deficit widened to US$776 billion, but services exports of US$421 billion and remittances worth US$143 billion helped cushion the overall external balance. India also retained its position as the world’s eighth largest services exporter in 2025. 3 On the production side, growth was driven by strong performances in both manufacturing and services. Inflation fell to a multiyear low as food and fuel prices eased, aiding consumer spending.

This also resulted in a subdued GDP deflator, keeping nominal GDP growth at 8.9%. While India ended the last fiscal with strong momentum, vulnerabilities like capital outflows and currency depreciation persisted. Toward the end of the fiscal, these headwinds intensified due to the Middle East conflict. Entering the new fiscal, India’s growth outlook is increasingly exposed to external headwinds and macro financial risks.

Performance in fiscal 2026 to 2027 will likely be shaped by several key risks. 5. Potential delays in the US-India trade deal: The US-India trade deal is in its final phase and will likely help to bring down tariffs on Indian exports to 10%. However, till it is concluded, uncertainty will likely persist. Besides, implementing the arrangement will take time, and it may not come into full effect until the next fiscal. 6.

Elevated global inflation and tight monetary policy: Tensions in the Middle East and intermittent disruptions to key trade corridors will likely keep input costs high. Even if freight and insurance markets normalize over the next few quarters, global prices are likely to remain elevated, leading to higher policy rates set by central banks in the West. For example, the European Central Bank announced a rate hike at its June meeting. 7.

The RBI’s monetary policy trade-offs: The RBI faces a tough balancing act between promoting growth, maintaining price stability, and keeping currency steady. In June, the RBI kept policy rates unchanged to support credit growth, which has lately improved by 17.7%, the highest level since May 2024, providing a buffer at a time when access to external financing is constrained.

At the same time, the RBI announced five measures to encourage capital inflows, including incentives to attract FCNR(B) deposits 11 and exemptions from capital gains tax on government securities. According to a study by the State Bank of India, these measures could bring in US$40 billion to US$45 billion over the next few months and support additional bank deposits of around INR4.5 trillion, thereby boosting banks’ willingness to lend.

12 In fact, overseas investors invested a record US$4.2 billion in Indian government bonds in June, marking the strongest inflow into debt instruments since August 2024. However, if inflation rises due to El Niño effects, the RBI may have to tighten its policy stance. Besides, measures to attract foreign capital will affect the balance sheet, adding risks to liquidity management and long-term financial stability.

Hence, in fiscal 2026 to 2027, economic performance will largely depend on how Indian policymakers navigate an increasingly uncertain external environment without compromising on domestic growth momentum. We expect economic growth to remain modest in the first half of the year and pick up in the second half, driven by a demand surge during the festival season (October to December) and the gradual easing of geopolitical uncertainties.

Trade deals with the United States, United Kingdom, and the European Union are expected… (AI-assisted rewrite, based on the original source)