Trade Tensions to Trim India’s Growth in FY26: Fitch Ratings

Fitch Ratings forecasts India’s FY26 GDP growth at 6.4%, slightly down from 6.5%, due to the U.S.-China trade war's global ripple effects. The agency cut 2025 global growth projections to 1.9%, with U.S. growth revised to 1.2% and China to 3.9%. Elevated tariffs, exceeding 100%, between the two nations drive this slowdown. Despite global challenges, inflation is expected to ease to 3.9% by 2025, prompting potential RBI rate cuts. Resilience and adaptive policies will be crucial for India’s growth.

The escalating trade conflict between the United States and China is expected to ripple across global economies, with India projected to experience a slight dip in its growth trajectory for FY26. Fitch Ratings, in its latest update released on April 17, forecasts India’s GDP growth at 6.4% for FY26, a marginal reduction from its earlier estimate of 6.5%.

This downward revision aligns with Fitch’s broader concerns about the global economic landscape. According to the agency, the ongoing trade war between the two economic giants is likely to hinder worldwide growth, even as tariff escalations momentarily take a backseat.

Global Growth Outlook Dampened by Trade War

Fitch Ratings has significantly downgraded its global growth projections, citing the intensifying trade dispute as a primary factor. In a special update to its Global Economic Outlook, the agency cut its 2025 global growth forecast by 0.4 percentage points. Projections for both the U.S. and China's economies have also been adjusted downward, with each country’s growth outlook trimmed by 0.5 percentage points since Fitch’s March forecast.

The United States is now expected to grow at a mere 1.2% in 2025, a notable drop from the earlier estimate of 1.7%. Meanwhile, China’s growth forecast has been revised to 3.9%, down from 4.4%. These adjustments reflect the broader economic strains stemming from the trade confrontation. Notably, global GDP growth is now anticipated to settle at 1.9% in 2025, marking the first time since the pandemic that it will dip below the 2% threshold.

The Impact of Tariffs

The trade war has led to a sharp increase in tariffs, with both the U.S. and China imposing over 100% tariffs on each other’s imports. This dramatic rise in trade barriers is a key factor behind the subdued growth expectations. Fitch’s report suggests that while it is challenging to predict the trajectory of U.S. trade policy, the elevated tariff rates are likely to persist. The agency assumes that the effective tariff rate (ETR) imposed by the U.S. on Chinese goods will remain above 100% for the foreseeable future, before eventually declining to 60% by 2026. For trade with other partners, Fitch continues to project a 15% U.S. ETR, consistent with its earlier estimates.

Inflation and Monetary Policy: A Silver Lining?

Amidst the gloomy growth outlook, Fitch offers a relatively optimistic take on inflation. The agency expects global inflation to ease to 3.9% by the end of 2025, providing some relief to policymakers and consumers alike. For India, this could mean further monetary easing by the Reserve Bank of India (RBI). Fitch anticipates an additional 50 basis points (bps) reduction in the policy rate, building on the 50 bps cut already implemented since February. By the end of 2025, the policy rate is expected to stabilize at 5.5%.

Challenges Ahead for India and the World

India’s slight downward revision in growth is emblematic of the broader challenges facing the global economy. As the U.S.-China trade war continues to disrupt international trade flows and dampen investor confidence, the ripple effects are being felt far and wide. While inflationary pressures may ease, the prolonged trade tensions underscore the need for adaptive policies and resilient economic strategies in the years ahead.

Fitch’s latest projections serve as a stark reminder of how interconnected the global economy is—and how vulnerable it can be to geopolitical tensions. For India, maintaining a robust growth trajectory amid these headwinds will require careful navigation of both domestic and international challenges.