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Lower tariffs

US President Trump announced overnight that US and India had agreed on a trade deal, under which reciprocal tariffs on India will be lowered to 18% from 25% earlier. There was no explicit mention of how the additional punitive tariff of 25% (due to Russian oil purchases) will be treated, although US Ambassador to India Sergia Gor said in press comments, that the final tariff rate will stand at 18% (vs 50% earlier). This was contingent on the country continuing to cut back on oil purchases from Russia. US President's social media post also indicated that India had agreed to reduce its tariffs and non-tariff barriers, while making commitments to step up purchases from the US to “over $500bn” of energy, technology, agricultural, and coal supplies etc, without alluding to any timeline. In return, India’s PM Modi said, on his social media handle, that “Made in India” products will now have a reduced tariff of 18%.

Impact

The tariff reduction effectively takes India’s tariff below most of the ASEAN countries (see table) and puts it at an advantageous position vs China. At the onset, this breakthrough is unequivocally positive for the real economy/ exports, sentiments as well as financial markets, while further details are awaited.

From US’ perspective, high tariffs had resulted in lower US purchases from India in second half of 2025 – which led India’s share in US’ imports to fall from 3.5% in May-Jun25 to 2.8% by Nov-Dec25.

On India’s end, exports to the US averaged 9.9% yoy between Apr25 and Dec25. The momentum, however slowed down during Sep-Dec25, when shipment growth contracted -0.2% yoy due to passage of frontloading demand and as punitive tariffs kicked in. To recall, India’s goods exports to the US rose 11.5% yoy to $86.5bn (~2% of GDP) in FY25 and imports at $46bn.

The sectoral breakdown in 9MFY26 showed that electrical machinery and equipment (including telecom/ smartphones) emerged as the main category of exports to the US, followed by pharma, nuclear equipment, mineral fuels, stones, chemicals etc. On other hand, growth in labour intensive sectors i.e. textiles, leather, gems & jewellery, and farm exports was negatively impacted by the tariff imposition.

To our understanding, Tariffs under Section 232 of the Trade Expansion Act will be exempt from this tariff relief, similar to the treatment for other nations. This will apply to sectors like auto and auto parts (25% tariff), steel and aluminium (50%), lumber, copper etc. This is likely to impact about a tenth of the export basket. 

As for fuel imports from Russia, imports of petroleum, crude and products from Russia moderated to $33bn in FY26 (YTD) – see chart, vs annual $53.5bn in FY25. There were earlier reports that private sector refiners had sharply reduced purchases following US sanctions on specific Russian entities last year. The US has moved up from the sixth largest supplier of petroleum and crude in FY25 to fifth in FY26 YTD (see chart). Full-year nominal fuel imports from the US are on course to be higher in FY26 than FY25.

Looking ahead

Textiles, gems & jewellery, engineering goods, leather and chemicals are likely amongst the key gainers in the immediate term. At the time of writing, an official press release is still awaited. An eventual unveiling of the bilateral trade agreement will provide more details on the beneficiary product lines and trade as well as investment commitments. While the US administration has called for a sharp cut in the tariff (nil on imports from the US) and non-tariff barriers from India, we expect the finer details to point towards a phased adjustment, evident in the other bilateral trade agreements that have been recently concluded. Selected sensitive and strategic sectors might be visited separately. A mutually beneficial bilateral trade agreement (BTA) will bode well for FDI flows, business confidence and the currency’s prospects.

Adopting a defensive posture, India’s external trade will continue to evolve in midst of risk of fresh geopolitical fissures. Navigating this shift has not only become increasingly complex, but also consequential. The evolving trade strategy has been a function of broadening trade linkages, fast tracking trade agreements, and exploring new markets (read India’s evolving trade strategy; deal with the EU). We expect this to sustain. From the US’ side, the Supreme Court ruling on the IEEPA tariffs is also awaited alongside any bouts of fresh pressure on bilateral trade ties which could alter the   extent of accrued benefits. 

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