A failure to finalise a trade deal between India and the U.S. could have “some negative impact” on the Indian economy, but a string of recent trade agreements and diversification of exports could cushion the fallout from any additional U.S. tariffs, Reserve Bank of India (RBI) Governor Sanjay Malhotra said on Wednesday.

“We do not know, first of all, which sectors will be impacted and to what extent these tariffs are going to be applied. So, it is premature. But it will obviously have some negative impact,” Mr. Malhotra said in response to a question from The Hindu.

However, India’s recent trade agreements, including those already operationalised and those in the pipeline, would help mitigate the impact, he said.

The governor also pointed to the diversification of India’s export markets and products as another buffer against a potential tariff shock.

“All these will mitigate the effect if, in case, there is an additional tariff on some of the sectors,” he said.

His comments come amid a prolonged deadlock in India-US trade negotiations. Union Finance Minister Nirmala Sitharaman said earlier this week that offering any further concessions to the U.S. would be difficult and that the talks had reached a “plateau”, with Washington reportedly seeking additional concessions.

The negotiations have assumed greater significance following the passage by the U.S. Congress in September of the Lindsey Graham Sanctioning Russia and Iran Act, which gives President Donald Trump powers to impose tariffs of up to 100% on countries, including India, over purchases of Russian and Iranian oil and gas. Mr. Trump has signed the legislation, but the additional tariffs have not been imposed, with the trade negotiations still underway.

Repo hike unlikely to derail credit growth

Mr. Malhotra also said the RBI’s 25-basis-point repo rate increase was unlikely to have an immediate impact on bank credit growth, as monetary policy transmission typically takes several quarters.

The rate hike will eventually push up borrowing costs as banks transmit the higher policy rate to lending rates, but the impact on credit growth is expected to emerge with a lag.

Indian garment exporters are hoping for tariff-rate quota, which countries such as the Bangladesh have got, from Washington as India is also a major buyer of U.S. cotton.

Officials in a couple of textile and apparel export promotion councils told The Hindu on Wednesday that the Indian government is trying to negotiate with the U.S. for tariff concession for garments that are made with U.S. cotton and are exported to that country. “Bangladesh, Indonesia, and Malaysia will not be charged the additional 10% tariff by America for garments that have U.S. cotton. However, this is a quota-based concession and will not apply for all garments exported by Bangladesh to the U.S. Australia offers India similar concessions,” said one of the officials. Further, India is talking to the U.S. for a bilateral trade agreement too.

India imports substantial quantity of American cotton and hence, the garment exporters have asked for tariff-rate quota for India too. While Indian exporters are at a disadvantage because of this concession to some of the competing countries, it may not affect India much because it is quota-based, they said.  

The threat of higher tariff on India because of its oil imports from Russia is another threat for the exporters now.

The officials said the U.S. is an important trading partner for India and its total garment imports are worth $80 billion. However, EU is also a major market, importing close to $ 120 billion worth garments. If India is able to expand deeper into the EU market, the garment exporters will have an alternative market to supply to, they added.