FROM TARIFFS TO TURBULENCE: TRADE POLICY AND FINANCIAL STABILITY IN INDIA’S BANKING SECTOR
AUTHOR – GANDHALI RAMESH KHAMKAR, A STUDENT OF LLM 2ND YEAR IN DES’ SHRI. NAVALMAL FIRODIA LAW COLLEGE, PUNE (AFFILIATED WITH SAVITRIBAI PHULE PUNE UNIVERSITY, PUNE)
BEST CITATION – GANDHALI RAMESH KHAMKAR, FROM TARIFFS TO TURBULENCE: TRADE POLICY AND FINANCIAL STABILITY IN INDIA’S BANKING SECTOR, INDIAN JOURNAL OF LEGAL REVIEW (IJLR), 6 (1) OF 2026, PG.1211-1219, APIS – 3920 – 0001 & ISSN – 2583-2344. DOI – https://doi.org/10.65393/DQOF8235
Abstract
When governments raise tariffs or impose sudden export restrictions, the immediate concern typically centres on trade competitiveness; however, the deeper consequence may lie elsewhere, in the stability of domestic banks. Trade regulation in India has historically operated through the Customs Act, 1962 and executive control over foreign commerce, shaped by commitments under the World Trade Organization and broader principles of international economic law. Banking stability, in contrast, is governed by the Reserve Bank of India Act, 1934, the Banking Regulation Act, 1949, and the Insolvency and Bankruptcy Code, 2016; frameworks designed to safeguard credit discipline, ensure capital adequacy, and preserve systemic resilience. These domains have evolved in parallel, institutionally and conceptually distinct, and are rarely examined as structurally interconnected within legal scholarship or regulatory design. Yet contemporary tariff escalations, retaliatory trade measures, export bans, carbon-border adjustments, and supply-chain realignments demonstrate that external trade shocks can significantly compress corporate revenues, disrupt export-dependent industries, intensify leverage stress, inflate non-performing assets, and accelerate insolvency proceedings. What begins as an instrument of economic diplomacy may therefore transmit volatility into bank balance sheets, credit markets, and broader financial stability indicators, affecting lending behaviour, capital provisioning, and risk-weight assessments. Despite this cascading effect, India’s macroprudential regulatory architecture does not explicitly categorise trade-policy volatility or geopolitical economic conflict as a systemic banking risk, nor does it formally integrate such disruptions into supervisory stress-testing frameworks or prudential oversight mechanisms. By tracing the doctrinal separation between trade governance and financial regulation, and analysing how tariff-induced corporate distress interacts with prudential norms, insolvency processes, and supervisory discretion, this article reconceptualizes trade policy as an internal generator of financial risk rather than merely an external economic tool. It argues for a more integrated regulatory approach in which financial supervisors anticipate and incorporate trade-policy shocks into systemic risk assessment, thereby rethinking the boundaries between international economic law and domestic banking stability in India.
Keywords: Banking Regulation, Financial Stability, Macroprudential, Systemic Risk, Tariffs, Trade Policy.