China targets Indian exports because the nation is regarded to be an American ally
India chooses not to side with the Donald Trump administration and the U.S. has a go at Indian exports
India retaliates against the U.S.
The last scenario is likely to cost the Indian economy the most, they wrote.
This goes against the argument that India is relatively insulated from a trade war, given its low share of total world exports of just 1.7 percent. President Donald Trump has threatened tariffs on $150 billion of Chinese imports in retaliation for alleged violations of intellectual property rights, while Beijing has vowed to retaliate on everything from American soybeans to planes.
Besides a possible trade war, a faster-than-expected tightening of U.S. monetary policy will lead to capital outflows. Rabobank’s models estimate India losing $22 billion in capital flows by 2022, with the scenario getting complicated further, in case political instability hits India. The South Asian nation heads into a national election early next year.
In such an event, the Rabobank model sees the rupee depreciating sharply and the missed capital flows will amount to $32 billion by 2022, they wrote.
“If India uses its foreign reserves in such a case, interest rates could rise sharply as liquidity decreases,” they wrote, adding that even though India’s reserves are substantial, markets might still become concerned about the prospects of further declines. “All in all, these developments will create major speed bumps on India’s road to economic prosperity.”