India’s medium-term economic outlook faces a risk from the continued delay in securing a trade agreement with the United States, DBS Bank said in its annual India 2026 outlook, warning that the absence of a deal could weigh on exports, investment flows and currency stability.
The report, authored by DBS Senior Economist Radhika Rao, said the lack of progress on a bilateral trade arrangement comes at a time when India is already navigating weak goods exports, uneven global demand and geopolitical uncertainty. She added that these headwinds could intensify without a formal trading framework with the US, India’s largest export destination.
“The delayed US-India trade deal remains a downside risk,” DBS said in the report, noting that a meaningful agreement would help anchor investor confidence, support manufacturing-linked exports and provide greater clarity for companies integrating India into their global supply chains.
Notably, the earlier collapse of the trade deal stemmed from a combination of political miscalculations and unmet expectations on both sides, media reports stated. Despite technical agreements on most issues, negotiators failed to close the deal due to India's overestimation of the US’s willingness to compromise and Washington’s desire for broader, high-visibility concessions.
“India is a tough nut to crack,” said Jamieson Greer, US Trade Representative. He added that the type of offers India has been talking to us has been the best they have ever received as a country. “Resistance in India to certain crops,” according to him. Notably, the government has been cautious about opening India’s politically sensitive agricultural market, prioritising the protection of millions of small farmers whose livelihoods are already in distress.
Many experts argue that exposing the sector to subsidised US agri-products and advanced, tech-driven farming methods could undermine local producers, destabilise prices, and exacerbate rural economic vulnerability, making careful policy calibration a necessity.
Tariffs, Threats And Progress In Trade Deal
In August 2025, US President Donald Trump signed an executive order imposing an additional 25 per cent tariff on imports from India, doubling the total duty rate to 50 per cent, citing New Delhi's continued purchase of Russian oil. India has strongly criticised the move as “unfair, unjustified and unreasonable.”
On 8 December 2025, Trump threatened to impose additional tariffs on Indian rice exports during a White House event, accusing India of dumping the product into the American market. The warning came as the president announced a USD 12 billion federal aid package for US farmers, responding directly to complaints from domestic producers about cheap imports.
His remarks came just before a delegation from the office of the US trade representative, led by Ambassador Rick Switzer, arrived in India for talks on 10 to 11 December. Experts noted that the steep tariffs are a pressure tactic aimed at pushing India into accepting a deal on American terms.
DBS said India will need to accelerate its trade diversification strategy as global demand remains uneven and protectionist tendencies continue to rise. While New Delhi has advanced negotiations with the UK, EU and other partners, the report said a breakthrough with the United States would carry the strongest signalling effect for investors and exporters.
“The absence of progress adds to medium-term risks,” DBS said, adding that strengthening the trade relationship with the US is critical for securing supply-chain investment, boosting manufacturing exports and improving India’s external sector outlook.
Commerce Secretary Rajesh Agrawal met Switzer to discuss bilateral trade and economic ties. "The two sides exchanged views on matters related to India-US trade and economic ties, including on the ongoing negotiations for a mutually beneficial Bilateral Trade Agreement," the commerce ministry wrote on X (formerly Twitter).
"We factor in the assumption that the US-India trade deal will be completed within FY26, with the lowering of the effective tariff rate (25% penalty to be removed and a cut in the baseline to 18-20 per cent, on par with regional peers)," Rao added.
Exports Under Pressure
India’s goods exports are under strain from global slowdown trends, weak discretionary demand and competitiveness issues in labour-intensive sectors such as textiles and gems and jewellery. While electronics and pharmaceuticals remain resilient, DBS said the broader export basket will remain constrained without a favourable trade architecture with major partners.
The government data revealed that India's exports to the US declined nearly 9 per cent year-on-year (YoY) in October to USD 6.31 billion from USD 6.91 billion a year ago; however, it was about USD 5.47 billion in September.
The bank said that supply-chain shifts triggered by the US-China strategic rift have created opportunities for emerging markets, including India. However, it warned that the full benefit of this reorientation may not materialise until New Delhi and Washington advance a structured trade understanding.
“A comprehensive framework would provide greater predictability for companies looking to diversify operations,” DBS said, adding that delays risk redirecting value-chain investments to other Asian economies.
The report warned that the absence of a trade deal could also influence foreign direct investment flows at a time when India is competing aggressively for semiconductor, electronics and data-centre investments. While domestic policy incentives and state-level support have attracted commitments, trade clarity with the US would complement these measures and lower operational risk for multinational companies.
India has received Rs 1.6 trillion in semiconductor-linked announcements and USD 42.5 billion in data-centre commitments for 2025, but DBS cautioned that uncertain global conditions, coupled with a lack of trade alignment with the US, could keep FDI inflows subdued.
Rupee Sensitivity To External Uncertainty
The DBS outlook said the rupee is expected to trade between 89.5 and 92.8 per USD by the end of 2026, with external risks such as the delayed US-India trade agreement adding to currency pressures.
While authorities appear more comfortable with allowing the rupee to weaken in line with fundamentals, the report said the absence of a trade settlement framework may erode export competitiveness and limit the ability to attract long-term flows needed to stabilise the balance of payments.
DBS forecasted that India’s balance of payments could slip into a small deficit by FY26, with the current account gap widening to 1 per cent of GDP. Trade uncertainties, including the stalled deal with the US, could exacerbate this pressure. The bank added that while foreign-exchange reserves are likely to remain between USD 680-700 billion, the margin for absorbing external shocks is narrowing.
India’s economy may be expanding at a robust 8.2 per cent, but the rupee has been sliding at a noticeable pace, prompting the State Bank of India (SBI) to caution markets against reading it as a sign of weakness. Earlier, Chief Economic Adviser (CEA) V Anantha Nageswaran stated that the government is unconcerned about the rupee’s recent decline against the US dollar. |
