How US Tariffs Could Impact Indian Banking System

• Reduced export revenues for Indian companies.
• Lower profitability and strain on working capital.
• Difficulty in repaying bank loans, increasing the risk of non-performing assets (NPAs) for Indian banks.

On the other hand, if the US primarily targets China or other economies, India could emerge as an alternate supplier. This shift could support Indian exporters, enhance their revenues, and reduce stress on banks’ loan books.

Currency Fluctuations and Forex Exposure
Trade tensions usually cause volatility in global financial markets. For India:

• The rupee may weaken against the US dollar.
• Exporters benefit from higher rupee realisations, but import-dependent industries (such as electronics, oil & gas, and chemicals) face higher input costs.
• For banks, this means forex-related risks rise and they must reprise credit exposure to vulnerable sectors.

• Costlier imports due to a weaker rupee or retaliatory tariffs can push inflation upwards in India.
• The Reserve Bank of India (RBI) may respond by tightening monetary policy (i.e., raising interest rates).
• Higher interest rates make borrowing costlier, thereby reducing demand for credit across retail (housing, auto) and corporate segments.
• For banks, this translates into slower loan growth and higher cost of funds.

Foreign Investment and Market Sentiment
Global tariff wars affect investor confidence. Foreign Institutional Investors (FIIs) may withdraw capital from Indian equity and debt markets, leading to:

• Stock market volatility, which impacts banks’ investment portfolios.
• Reduced foreign capital inflows, which could raise the cost of external borrowings for Indian banks and corporates.

Overall Economic Growth and Banking Sector Health
The combined effect of weaker exports, costlier imports, and volatile capital flows can slow down India’s GDP growth.

• Slower growth results in weaker loan demand.
• Banks may need to realign sectoral lending strategies, focusing on domestic-oriented sectors that benefit from protectionist trade policies.

Summary of Impacts

• Negative: Higher NPAs from exporters, weaker rupee, inflationary pressure, slower credit growth.
• Positive: Export gains if US tariffs target competitors like China, stronger loan demand in selected sectors.
• Net Result: Indian banks will face a mixed impact, but the balance tilts towards caution, as trade wars usually disrupt financial stability more than they help.
  
  [Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the editorial stance of this publication.]