New FTAs can cushion tariff blow: RBI chief

1. At a Glance

• RBI Governor Sanjay Malhotra said that if India fails to finalise a trade deal with the U.S., the Indian economy could take "some negative impact." He added that India's new free trade agreements (FTAs) and its move to diversify export markets and products could soften the effect of any extra U.S. tariffs [1].
• For UPSC, this links monetary and macro stability (GS-III), trade policy and FTAs (GS-II/III) and India–U.S. relations (GS-II).
• India has run an unusually busy FTA programme in 2024–26: UK CETA, EFTA TEPA, Oman CEPA, New Zealand FTA and the India–EU FTA [2][3][4][5].

2. Why in the News

• The RBI Governor spoke on 7 October 2026 (a Wednesday), and The Hindu carried the report on 8 October 2026 [1].
• He said it is "premature" to judge the impact because "we do not know… which sectors will be impacted and to what extent these tariffs are going to be applied" [1].
• The comments come during a prolonged deadlock in India–U.S. trade talks. Earlier that week, Finance Minister Nirmala Sitharaman said that further concessions to the U.S. would be difficult and that the talks had reached a "plateau". Washington is reportedly asking for more concessions [1].

3. Background & Evolution

• 10 March 2024: India signs the India–EFTA Trade and Economic Partnership Agreement (TEPA) [3].
• July 2025: India and the UK sign the Comprehensive Economic and Trade Agreement (CETA) [2][3].
• 1 October 2025: EFTA TEPA enters into force [3].
• December 2025: India and Oman sign the India–Oman CEPA [3].
• 22 December 2025: The India–New Zealand FTA is announced [3].
• 27 January 2026: India and the EU conclude negotiations on the India–EU FTA, called the "Mother of All Deals" [5].
• October 2026: India–U.S. talks are stuck at a "plateau", and the RBI chief cites the new FTAs as a buffer against tariffs [1].

4. Core Static Facts

• Who said it: Sanjay Malhotra, Governor of the Reserve Bank of India [1].
• Ministerial statement: Union Finance Minister Nirmala Sitharaman described the U.S. talks as having reached a "plateau" [1].
• Terminology: India uses different names for its trade pacts — CETA (UK), CEPA (Oman), TEPA (EFTA) and FTA (NZ, EU). All of them are preferential trade agreements [2][3][5].

5. Multi-Dimensional Analysis

Economic

• Additional U.S. tariffs would have "some negative impact." How large depends on which sectors are hit and how far [1].
• The FTAs, both those in force and those in the pipeline, reduce dependence on a single market. Broad duty-free coverage helps: 99% of exports to the UK and 100% to NZ [1][2][3].
• Diversifying products as well as markets is the second buffer the Governor named [1].

Geopolitical / Strategic

• India is pursuing several deals at once with the UK, EU, EFTA, Oman and NZ. This gives it bargaining leverage in the bilateral talks with the U.S. [1][3][5].
• Market access is spread across Europe, West Asia and the Asia-Pacific [3].

Governance / Policy coordination

• The central bank (RBI) and the Finance Ministry are giving consistent messages: the impact is real but can be managed, and India will hold its line on concessions [1].

Investment

• The NZ FTA comes with an investment commitment of USD 20 billion over 15 years. This shows the newer FTAs go beyond tariffs to cover capital flows [3].

6. Recent Developments (last 12–18 months)

• July 2025: India–UK CETA signed [2].
• 1 October 2025: India–EFTA TEPA comes into force [3].
• December 2025: India–Oman CEPA signed [3].
• 22 December 2025: India–NZ FTA announced [3].
• 27 January 2026: India–EU FTA negotiations concluded [5].
• Early October 2026: FM Sitharaman says the U.S. talks are at a "plateau" [1].
• 7 October 2026: RBI Governor says the FTAs and diversification will cushion any tariff shock [1].

7. Prelims Hooks

• The India–EFTA TEPA was signed on 10 March 2024 [3].
• The India–EFTA TEPA entered into force on 1 October 2025 [3].
• The India–UK agreement is called CETA (Comprehensive Economic and Trade Agreement), not CEPA [2].
• India–UK CETA was signed in July 2025 [2].
• CETA gives duty-free access to 99% of India's exports to the UK [2].
• India–Oman CEPA was signed in December 2025 [3].
• Oman offers zero duty on 98.08% of its tariff lines [3].
• Those lines cover 99.38% of India's exports to Oman by value [3].
• The India–NZ FTA was announced on 22 December 2025 [3].
• The India–NZ FTA removes duty on 100% of Indian exports [3].
• The India–NZ FTA includes a USD 20 billion investment commitment over 15 years [3].
• The India–EU FTA, the "Mother of All Deals", was concluded on 27 January 2026 [5].
• The RBI Governor in October 2026 is Sanjay Malhotra [1].

8. Why New FTAs Cannot Quickly Replace the U.S. Market

• The U.S. is much bigger than any single new partner
• The U.S. is India's largest export market. It takes about 18% of India's total exports [8].
• Exports to the U.S. were about 2.2% of India's GDP in FY24 [8].

• India's exports to the U.S. were USD 86.35 billion in 2024 [8]. Small partners like Oman or New Zealand cannot take in that much extra demand in a short time.

• Duty-free access does not mean someone will buy

• An FTA only removes the tax at the border. The exporter still needs buyers, contracts, quality approvals and shipping links in the new country.

• Building these takes years. A tariff shock (a sudden rise in import tax) can hurt in months.

• Some sectors depend heavily on the U.S. alone

• The U.S. bought about USD 2 billion of Indian frozen fish and shrimp, nearly one-third of India's world exports of these items [10].
• After the 2025 tariff hike, gems and jewellery shipments to the U.S. fell more than any other sector [11].

• These workers are mostly in MSMEs (small firms) and coastal or cluster towns. A cushion that works for the economy as a whole may not reach them.

• The biggest cushion is not working yet

• The India–EU FTA is the largest deal. But in January 2026 only the talks were concluded. It still has to be signed and ratified before it starts [5].
• The EFTA deal took about 18 months to go from signing to being in force [3]. If the EU deal moves at a similar pace, it cannot help with a tariff hit this year.

9. Signing a Deal Is Not the Same as Using It

• Indian exporters use only a small part of their FTA benefits
• Only about 20–30% of Indian exports that could get FTA duty cuts actually claim them [6].
• Exporters from partner countries who sell to India use 60–70% of theirs [6].

• So the 99% or 100% "duty-free coverage" figures in the note show what is possible, not what exporters will actually get.

• Rules of origin make the paperwork costly

• Rules of origin (RoO) are the conditions a product must meet to count as "made in India". Only then does it get the lower duty.
• Proving origin needs certificates and records of where every input came from. For many firms, this costs more than the duty they would save, so they just pay the normal duty [6].

• Small firms are hit hardest, because they have no staff to handle compliance [6].

• The duty saved is often small

• Most of India's FTA partners already have low import duties [6].
• When the normal duty is already low, an FTA saves very little. A small benefit plus heavy paperwork means exporters simply ignore the FTA.

10. The Old Worry: Imports Grow Faster Than Exports

• The case against relying on FTAs
• Critics say India's earlier FTAs helped partners sell to India more than they helped India sell abroad.
• India itself asked ASEAN to review their FTA and pushed for stronger rules of origin. The fear was that goods from third countries were entering India through ASEAN [7].
• Even in Q2 FY26, India imported far more from its FTA partners than it exported to them. The gap was about USD 31 billion [6].

• So a cushion for exporters can also bring in a wave of imports, and domestic producers face more competition.

• What this argument gets right

• An FTA opens both doors. Whether India gains depends on whether its firms can compete, not just on the deal being signed.

• Low use of FTA benefits (see above) makes this worse: partners claim their duty cuts, Indian firms do not.

• Why it does not fully apply here

• The new partners (UK, EFTA, EU, NZ, Oman) are mostly high-wage or small economies. Most of what they sell is not what Indian MSMEs make.
• India's recent deals use strict rules of origin, which partly answers the problem of goods coming in through a partner [6].
• Honest conclusion: these FTAs are a reasonable long-term hedge (a backup that lowers risk). They do not fix a short-term tariff shock.

11. Part of the Tariff Blow Has Already Been Softened

• Read the Governor's warning against what has already happened
• In February 2026, under an India–U.S. framework, the U.S. tariff on USD 30.94 billion of Indian exports was cut from 50% to 18% [8].
• The tariff on another USD 10.03 billion was cut from 50% to zero, including diamonds, platinum and coins [8].

• So the October 2026 risk is about additional tariffs if the full trade deal fails. It is not a return to the 2025 shock from scratch.

• Why the Governor calls it "premature" to judge

• The damage depends on which product lines get hit [1]. A tariff on shrimp or textiles (many workers, small firms) hurts jobs much more than one on goods that use a lot of machines and few workers.
• RBI can only work on the whole economy, through interest rates and the rupee. It cannot target help to one hit sector. That is why the Governor points to trade policy, not monetary policy, as the cushion.

12. What the Commerce Ministry Should Do Next

• Make FTA benefits easy to claim
• The weak point is use, not coverage [6]. The Department of Commerce should make origin certificates simple and digital, and train MSME clusters to apply.

• This is possible. Under the India–Australia ECTA, Indian exporters used 77% of the benefits within nine months [9]. So low use is a problem that can be fixed, not something built into FTAs.

• Help the sectors most tied to the U.S. first

• Shrimp and gems exporters rely heavily on the U.S. [10][11]. Export promotion councils should take them to buyers in the UK, EU and EFTA markets that India's FTAs have opened.

• Track results, not signatures

• The government reports FTA success by the share of tariff lines covered [3][4]. It should also publish, partner by partner, how much FTA benefit exporters actually claim. That number shows whether the cushion is real.

13. Anchors for Answers

• Data: The U.S. takes about 18% of India's exports, about 2.2% of GDP (FY24) [8]
• Data: Indian exporters claim FTA benefits on only 20–30% of eligible exports. Exporters selling to India claim 60–70% [6]
• Data: In Feb 2026, U.S. tariffs on USD 30.94 bn of Indian exports were cut from 50% to 18% [8]
• Report/Committee: GTRI (Global Trade Research Initiative) assessment, 2026: rules-of-origin compliance costs keep FTA use low [6]
• Law/Case: GATT Article XXIV (WTO): allows FTAs as an exception to MFN (equal treatment for all trading partners)
• Comparison: India–Australia ECTA: 77% of benefits used within 9 months, showing high use is achievable [9]

14. Mains Relevance

• GS-III: Indian economy, covering growth, external sector, effects of liberalisation, and trade policy.
• GS-II: Bilateral, regional and global groupings and agreements involving India; effect of developed countries' policies on India's interests.
• Possible question stems: 1. "Rising protectionism in major economies calls for a diversified trade strategy." Assess how India's recent FTAs can cushion the effects of U.S. tariff actions. 2. India's recent FTA push marks a shift from its earlier caution about trade agreements. Critically examine the opportunities and risks for domestic industry. 3. Discuss the role of export-market and product diversification in protecting India's macroeconomic stability from external trade shocks.

15. Related Topics to Study Next

• India–EU FTA: the largest deal in the pipeline, and central to diversifying exports.
• India–UK CETA: covers 99% of export lines; check its services and mobility provisions.
• India–EFTA TEPA: India's first FTA in force with a European bloc, with an investment-linked model.
• India–U.S. trade negotiations / Bilateral Trade Agreement: the source of the tariff risk.
• RBI Monetary Policy Committee and the external sector outlook: how tariff shocks feed into RBI's growth and inflation projections.
• Current Account Deficit and rupee management: the macro channel through which a trade shock is transmitted.
• Foreign Trade Policy 2023 / export promotion schemes: the domestic policy side of diversification.
• WTO rules on FTAs (MFN exceptions): the legal basis for preferential deals.

16. NCERT Concepts to Revise

• Free trade agreement (Economy): The article's central idea: new FTAs with the UK, EU, EFTA, Oman and New Zealand cushion tariff shocks.
• Tariff (Economy): The risk is extra U.S. tariffs on Indian goods, which could hurt exports and growth.
• Comprehensive economic partnership agreement (Economy): Explains CEPA and CETA, the deeper pacts with Oman and the UK, and how they differ from a plain FTA.
• Protectionism (Economy): Rising U.S. tariffs are protectionism, the trend that makes India diversify its trade partners.
• Exceptions to MFN (Economy): FTAs are allowed under WTO rules as an exception to MFN non-discrimination, giving them their legal basis.
• Market access (Economy): FTAs give duty-free entry to partner markets, such as 99% of exports to the UK.

17. Common Errors / Trap Areas

• Signed vs entered into force: EFTA TEPA was signed on 10 March 2024 but came into force only on 1 October 2025 [3].
• Mixing up the acronyms: UK = CETA, Oman = CEPA, EFTA = TEPA [2][3].
• Oman figures: 98.08% refers to Oman's tariff lines, while 99.38% refers to India's exports by value. These are easy to swap [3].
• EU FTA status: In January 2026 negotiations were concluded. Do not assume it is already in force [5].
• EFTA is not the EU: EFTA is a separate bloc of Switzerland, Norway, Iceland and Liechtenstein. Its membership is general background knowledge, not from the retrieved sources.