Expert view: Vikram Chhabra, Senior Economist, 360 ONE Asset, says India’s growth and inflation dynamics are favourable. He expects the RBI to cut the repo rate by 100-125 basis points in the current rate-reduction cycle. In an interview with Mint, Chhabra also discusses the risk of stagflation in the US and how a slowdown in the US economy could affect Indian exports. Here are edited excerpts of the interview:
What is your assessment of inflation and economic growth trends in India? Is the worst behind us?
We believe India’s economic growth has bottomed out and is now entering a recovery phase.
The broader macroeconomic environment has also become increasingly supportive.
First, the Reserve Bank of India (RBI) has eased monetary policy by cutting the repo rate by 50 basis points and infusing the banking system with surplus liquidity.
Second, the recent income tax cuts announced in the Union Budget are expected to raise household disposable incomes, supporting a rebound in urban consumption.
Third, the India Meteorological Department’s (IMD) projection of an above-normal monsoon bodes well for the agricultural sector and rural demand.
Meanwhile, inflation has eased significantly over the past six months and is expected to remain broadly aligned with the 4 per cent target through FY26. Softer crude oil prices and a strong rabi harvest further reinforce the benign inflation outlook.
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There is still significant uncertainty surrounding the India-US trade deal. Do you think a less favourable agreement with the US could have serious implications for the Indian economy?
Bilateral trade agreements are inherently designed to be mutually beneficial, offering improved market access, reduced trade barriers, and policy stability.
We have high expectations for the India-US trade deal. It has the potential to strengthen India’s manufacturing sector by improving access to the US market.
So far, India has had only limited success in penetrating the US market.
Our analysis of UN Comtrade data shows that, between 2016 and 2024, India’s share of US merchandise imports rose by just one percentage point, from 2 per cent to 3 per cent.
Meanwhile, China continues to dominate US imports across a wide range of product categories, where India’s presence remains negligible.
A well-negotiated trade deal could provide the necessary impetus to expand India’s goods exports to the US, particularly as the US and China clash over economic, technological, and geopolitical dominance, accelerating the decoupling between the two economies.
What are your expectations from the RBI’s monetary policy? Is a rate cut of over 100 basis points possible in the current cycle?
The inflation outlook remains benign, giving the RBI room to prioritise growth. In its April 2025 policy, the RBI projected FY26 real GDP growth at 6.5 per cent YoY.
We believe India has the potential to move to a higher growth trajectory, which would require continued policy support.
Meanwhile, the external environment remains volatile, with heightened geopolitical tensions, rising geo-economic fragmentation, and persistent global uncertainty, all of which pose downside risks to growth.
Against this backdrop, we see scope for further rate cuts of 50-75 basis points. Thus, the current rate-cut cycle could total 100-125 basis points, bringing the terminal repo rate down to 5.25-5.50 per cent.
The US Fed’s last policy statement flagged concerns over inflation and a growth slowdown due to tariffs. How serious is the risk of stagflation in the US?
The US economic activity is losing momentum, weighed down by tariffs and erratic policymaking.
GDP growth forecasts for 2025 have also been significantly revised downwards.
At this stage, the impact of tariff hikes on the US economy remains highly uncertain, as the measures themselves are fluid and will depend on the number of bilateral agreements the US is able to finalise.
However, if the announced tariff increases are sustained, they could push inflation higher, increasing the risk of stagflation.
Consumer surveys also reveal rising risks of stagflation, as consumer sentiment has declined while inflation expectations have increased.
How could a slowdown in the US affect emerging markets like India?
A US slowdown could significantly impact certain emerging markets that are heavily reliant on US exports.
For example, our analysis of US census and IMF data suggests that the value of merchandise exports to the US amounts to nearly 29 per cent of Vietnam’s GDP and around 12 per cent of Thailand’s and Malaysia’s GDP.
India, by comparison, is relatively better placed, with exports to the US amounting to only 2 per cent of GDP.
However, a potential US slowdown could still weigh on India’s merchandise exports, particularly in sectors such as electronics, gems and jewellery, textiles and apparel, pharmaceuticals, and capital goods.
More notably, India’s software services exports are likely to be significantly impacted, given their strong dependence on the US market.
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Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions, as market conditions can change rapidly, and circumstances may vary.
