Data from the July flash PMIs indicate that the slowdown in economic activity is deepening, driven primarily by softer domestic demand and renewed cost pressures. Manufacturing remains the more resilient sector, backed by stronger external demand as businesses build up inventory buffers amid heightened global uncertainty.
Service Sector Pressures and Geopolitical Risks
Conversely, service providers face mounting competitive pressures and weaker demand conditions. Looking ahead, renewed tensions in the Middle East introduce downside risks via elevated energy costs and potential supply-chain disruptions. Furthermore, an uptick in price pressures could complicate the Reserve Bank of India's cautious wait-and-see policy stance.
New US Tariffs and Trade Negotiations
Regarding trade policy, the United States imposed a fresh 10 percent tariff on imports originating from India following findings concerning forced labor within supply chains. This tariff took effect on July 24, replacing the temporary 10 percent levy introduced under Section 122 that expired on the exact same day. Meanwhile, India's Commerce Ministry noted that 45 percent of goods, including electronics and pharmaceutical products, will remain exempt from this new tariff. The ministry added that bilateral trade negotiations with the United States are ongoing, with an aim to achieve an early conclusion.
Capital Inflows and RBI Measures
Steps taken by the Reserve Bank of India to attract foreign inflows are gaining traction. Domestic banks reported holdings of 20.7 billion US dollars in FCNR(B) deposits, external commercial borrowings, and overseas foreign currency borrowings as of July 17. These targeted measures are estimated to pull in up to 80 billion US dollars by the end of the year. The FCNR(B) facility is scheduled to close on September 30, whereas the ECB and OFCB schemes will expire on December 31.
