Daily Voice: Tariffs a concern but unlikely to derail India’s growth, says Niraj Kumar of Generali Central Life Insurance

Yes, we believe a temporary pause is appropriate at this stage of the cycle. Following the 50 bps rate cut in June, our view has been that the current easing cycle needs some more time before the next move. The MPC’s decision to hold rates at the latest policy meeting—despite a relatively benign inflation outlook for FY26 and persistent global trade uncertainties—underscores its forward-looking stance. The upward revision in the Q1FY27 inflation forecast to ~5 percent and the renewed focus on core inflation signal that the bar for additional easing has been meaningfully raised.

The RBI appears to be prioritizing inflation expectations over transitory disinflation trends. Its cautious, data-driven “wait-and-watch” approach reflects a desire to assess the full transmission of previous policy actions before taking further steps. In our view, this is a prudent strategy that supports macroeconomic stability and balances the growth and inflation dynamics beautifully.

Do you expect the RBI to consider further rate cuts only if growth materially underperforms its forecast?

We believe the RBI is preserving its limited monetary policy space to respond to potential downside risks to growth, rather than using it preemptively. With GDP growth expected to hold at 6.5 percent, and inflation projected to average around 5 percent, the central bank seems inclined to let past policy easing play out before contemplating further cuts.

Unless growth materially weakens relative to projections, we do not see further accommodation as the base case. That said, should adverse external shocks—such as trade disruptions or global demand slowdown—pose a credible threat to domestic growth momentum, the MPC retains the flexibility to respond.

Do you believe the proposed US tariffs under Trump would not pose a significant threat to the Indian economy?

While India is not fully immune to the potential impact of US tariffs, we believe the macroeconomic implications are manageable. Preliminary estimates suggest that a 25 percent tariff could shave off 0.3–0.4 percent from GDP, while a more aggressive 50 percent scenario may lead to a drag of around 0.7 percent of GDP. These are headwinds but not destabilizing in the broader scheme of India’s growth story, which is increasingly being driven by domestic structural factors.

Some export-oriented sectors, such as textiles and auto components, may face near-term pressure depending on the final tariff structure. However, strengthening domestic demand in H2 and growing export market diversification provide some cushion. We remain mindful of secondary risks—including weaker global trade sentiment, capital flow volatility, and supply chain disruptions—which could indirectly affect business and market sentiment.

Importantly, we see scope for diplomatic engagement to mitigate the most severe tariff risks. Overall, while the threat of tariffs cannot be ignored, we do not see them as materially altering India’s medium-term growth trajectory.

Could the RBI’s prolonged pause still be viewed positively by equity markets?

Yes, we believe the RBI’s hawkish pause could be supportive of equities in the current environment. By maintaining rates and projecting 6.5 percent growth with inflation within a manageable range, the central bank is signaling macroeconomic stability—a factor that markets typically appreciate.

This pause also allows the full effects of past rate actions to transmit through the economy, reducing the risk of unnecessary policy shifts that could add volatility. While a rate cut is unlikely in the near term, the combination of stable macro fundamentals and an expected pickup in earnings growth in H2 provides a constructive backdrop for equities.

Do you see any significant reasons for a correction in equity markets at present?

While there is no immediate domestic catalyst for a sharp correction for India, we believe it is prudent to remain cautious but constructive. Indian equities have shown notable resilience, navigating through geopolitical uncertainties, trade-related concerns, and muted earnings growth. However, markets are now trading at relatively elevated valuations, and any negative surprise—be it on the earnings front, macroeconomic indicators, or global developments—could trigger volatility.

A sharper-than-anticipated slowdown in the US, escalation of trade tensions, or a resurgence in risk aversion globally could materially alter market sentiment. Moreover, with global markets having priced in a fair amount of optimism, the margin for error has narrowed globally. Though steady domestic institutional flows continue to provide support, external shocks could still drive corrections or prompt sectoral rotations.

Hence, a cautious and selective approach remains warranted at this stage. That said, India’s structural equity story remains intact, underpinned by the lagged effects of monetary, fiscal, and regulatory support, strong corporate balance sheets, and a well-capitalized banking system. These fundamentals continue to offer medium-term resilience.

Are you still constructive on the pharma and healthcare sectors despite potential US tariff risks?

We remain selectively constructive on pharma and healthcare, but with key distinctions between the two. The healthcare segment—comprising hospitals and diagnostics—is largely domestic in nature. We remain positive on its long-term growth prospects, though elevated valuations have led us to adopt an underweight stance for now, but we continue to be constructive as the space has a lot of potential.

In the case of pharma, we are less concerned about the tariff risk. India accounts for a substantial portion of US generic drug volumes, making a sharp disruption in the supply chain impractical in the short term. Additionally, the return profiles of these companies are not high enough to make them obvious targets of punitive action.

Our concern lies more with concentration risk—many companies have become heavily reliant on a narrow set of products, such as generic Revlimid. As volume caps phase out, replacing those earnings streams could prove challenging. As a result, we remain highly selective in our exposure to the pharma sector.

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