The Indian banking sector is bracing for the potential fallout from increased tariffs imposed by the United States. In August 2025, the Trump administration announced an additional 25% duty on Indian exports involving the import of Russian oil, effective August 27, bringing the total duty to 50%. This action, a consequence of India's continued imports of Russian crude oil, is expected to have a ripple effect throughout the Indian economy, with the banking sector facing potential headwinds.
While direct export exposure to the U.S. is limited to about 2% of India's GDP, several export-dependent sectors could face considerable strain. Key sectors at risk include textiles, jewelry, apparel, seafood, machinery, mechanical appliances, chemicals, and auto components. The U.S. is a major market for these industries, and the higher tariffs could diminish competitiveness and squeeze profit margins.
CreditSights, a Fitch Ratings arm, suggests that the direct risk to Indian banks from these sectors appears limited, with exposure under 10%. However, the report anticipates "second-order" effects that could impact the banking sector. These include a potential increase in credit costs, even if asset quality remains stable. A likely slowdown in corporate loan demand, already subdued in the first quarter of FY26, is also expected. Furthermore, investor sentiment toward future investments may decline.
Banks are already taking steps to mitigate the potential impact. Measures under consideration include temporary interest concessions, flexible repayment structures, and working capital lines to help manage cash flow pressures arising from delayed shipments. Some banks are also advising exporters on diversification strategies, encouraging them to shift exports to other markets like the EU, UK, ASEAN, and Africa. Banks are increasing sector-specific monitoring to identify stress early and ensure prompt resolution.
The tariffs exacerbate existing challenges for Indian banks. Slowing credit growth and pressure on margins were already anticipated for 2025. The RBI's decision to increase risk weightings on bank lending to non-banking financial companies and unsecured loans has contributed to a decline in credit growth in these key segments.
Moreover, the Indian banking sector is navigating a complex landscape of evolving regulatory compliance, rising cybersecurity threats, and global economic uncertainty. Banks are investing heavily in advanced cybersecurity tools, including AI-driven behavior tracking systems, to detect and prevent potential breaches. They are also focusing on employee and customer education on cybersecurity best practices.
Despite these challenges, the Indian banking sector has shown resilience. The NPA ratio has improved, and the Capital Adequacy Ratio remains healthy. The sector is also embracing innovation, with greater adoption of AI and predictive analytics, and collaborations with fintech companies to streamline operations and improve customer experiences.
The long-term impact of the tariffs will depend on several factors, including the duration of the higher tariff regime and any potential negotiations or policy changes. While the direct impact on banks' asset quality may be manageable, the potential slowdown in corporate loan demand and dampened investor sentiment could further strain the sector.
