Trade wars and global economic uncertainty

Economic uncertainties—driven by geopolitical tensions, trade disruptions, and volatile crude oil prices—have a direct or indirect likelihood of straining credit markets, both globally and in India.

By Siddharth Shah and Priyanka Jhunjhunwala 

As we progress through 2025, the global economy is grappling with heightened uncertainties that are reshaping the financial landscape worldwide. The intensifying US–China trade tensions have disrupted international trade flows, while geopolitical conflicts in regions such as West Asia and Eastern Europe add further layers of complexity. Concurrently, crude oil prices have softened due to subdued global demand, influencing inflation dynamics globally. The UN Trade and Development Agency has also hinted at a recessionary trend, forecasting a dip in global growth from 2.8% in 2024 to 2.5% in 2025.

During 2018–2019, the imposition of tariffs by the US had similar implications for India, where the Indian rupee depreciated, inflation surged, and lenders became more wary, tightening their credit norms—especially in globally sensitive sectors. The current trade developments mirror past events, given the country’s vulnerability to services trade and its high trade deficit.

These global economic uncertainties—driven by geopolitical tensions, trade disruptions, and volatile crude oil prices—have a direct or indirect likelihood of straining credit markets, both globally and in India.

On the wholesale side, as global investors turn risk-averse, the availability of foreign capital for Indian corporates in the form of Foreign Direct Investment (FDI) or External Commercial Borrowings (ECBs) might be impacted. Borrowing through ECBs might either become harder or more expensive. Indian industries exposed to global supply chains such as certain manufacturing firms and auto companies might face higher borrowing costs and strict credit terms due to global demand and exports going down as well as costlier raw material imports. Banks and FIs might also have to revisit their underwriting standards from lending in sectors getting impacted by global uncertainty, prompting lenders to enhance their provisioning buffers and monitor early warning signals more closely.

On the retail side, due to uncertain employment and inflation expectations, the consumers might become more cautious of taking additional non- essential credit in terms of personal loan or credit cards. Salaried individuals working in export dependent industries might be subjected to job market fragility which will then impact household spending behavior. Small businesses and MSME borrowers linked with global supply chains or relying on consumer demand might show some stress and an impact on delinquencies which already has been a sensitive area for NBFCs.

In response to this global economic uncertainty, Reserve Bank of India has timely intervened and taken proactive measures to protect domestic financial condition and keep the credit momentum intact. In April 2025 Monetary Policy Committee (MPC) meeting, RBI brought in the second consecutive rate cut reducing the repo rate from 6.25% to 6.00% and shifting its policy stance from “neutral” to “accommodative” alluding towards further easing if necessary to support growth in the economy. Since the start of the year, RBI has taken active measures to infuse liquidity into the system through the means of bond purchases or currency swaps. In recent times, RBI has also been eyeing unsecured retail lending closely and urging Banks & NBFCs to strengthen provisioning and monitor consumer finance & MSME portfolios, which might show early signs of strain.

As volatility looms over the global economy, the RBI’s regulatory vigilance and proactive measures may contribute to domestic resilience. While export-linked sectors will face challenges in navigating their way forward, the Indian credit ecosystem appears reasonably insulated to absorb external shocks. The global economic situation continues to evolve, and the final impact will only become clear in the days to come, as new data and figures emerge.

(Siddharth Shah, Director, Crisil Intelligence & Priyanka Jhunjhunwala, Manager, Crisil Intelligence.)

Views are personal, and do not represent the stance of this publication.