Sensex, Nifty: Stock market cheered Trump tariff pause but Nomura has a warning; 4 scenarios

Even as a relief rally on Dalal Street sent Sensex soaring nearly 1,400 points on Tuesday, Nomura has a warning. The foreign brokerage has revised upward its base case for US tariffs, despite the delayed implementation of tariffs on Mexico and Canada. 

On Tuesday, the BSE Sensex was up 1,397.07 points or 1.81 per cent at 78,583.81. Nifty stood at 23,739.25, up 378.20 points or 1.62 per cent. In what was seen as muted retaliation, China imposed 15 per cent tariff on coal and LNG and 10 per cent on crude oil imports from the US. 

“Despite the delayed implementation of tariffs on Mexico and Canada, we revise up our base case for tariffs. We believe the likelihood of tariffs on Mexico and Canada is higher than it was previously,” Nomura said.

The foreign brokerage noted that the increase in China tariffs alone makes this the biggest single tariff increase Donald Trump has enacted in either of his presidential terms.

If these tariffs fully take effect, their size will dwarf the entirety of the tariffs Trump imposed during his first term in office, Nomura noted.

While the broking firm had expected Trump to institute more tariffs than the consensus, the tariffs announced alone are roughly equal to the total magnitude of tariffs that it expected in 2025, albeit targeted at different countries. 

“With more tariffs likely, particularly after Trump stated that tariffs on the European Union are definitely coming and that his administration is considering targeted tariffs on certain goods such as semiconductors, we believe there is significant upside risk even to our aggressive tariff assumptions,” Nomura said.

Tariff scenarios

Scenario 1 (old baseline)
Trump quickly rescinds or never implements most of the tariffs on Canada and Mexico. However, Trump moves ahead with tariffs on China, ramping up the tariffs by 35 percentage points in 2025. In addition, Nomura assumed that 5 per cent across the board tariffs are levied in Q2 and Q3, respectively (10 per cent in total). 

“Based on our calculations, the average effective rate peaks at 11 per cent in Q3, and then returns to 10 per cent in 2026. In this case, core PCE US inflation reaches 3 per cent YoY in December 2025, and Q4/Q4 real GDP growth slows to 1.8 per cent from 2.5 per cent in 2024. It is also likely to generate around $190 billion a year in revenue on average over 2025-28,” Nomura said.

Scenario 2 (current baseline)
In this scenario,  Nomura includes its old baseline and 10 per cent tariffs on Canada and Mexico. This leads to a pick up in the effective tariff rate to 14.4 per cent, before import substitution pushes it down to sub-10 per cent in early 2027. 

In this case, Nomura assumes the core US PCE inflation rising to 3.3 per cent YoY in December this year and Q4 real GDP growth decelerating to 1.6 per cent. Under this scenario, revenues generated are likely to average $285 billion a year for FU25-28.

Scenario 3 (baseline plus Canada & Mexico tariffs to 25%)
Assuming the Trump’s recent actions (about Canada and Mexico) ultimately go into effect, in addition to tariffs listed in scenario 1, this scenario includes broader tariffs, limiting import substitution. 

The average effective rate jumps to 17.6 per cent in Q4, before gradually edging down to 15 per cent in 2026. “Under this scenario, core US PCE inflation accelerates substantially to 3.7% y-o-y in December this year and Q4/Q4 real GDP growth softens to 1.5 per cent. Revenues from tariffs under this scenario are likely to average $350  billion a year over 2025-28,” Nomura said.

Scenario 4 (no new tariffs): 
While not its expectation, Nomura even considered the scenario whereby Trump ultimately does not impose any substantive new tariffs and rescinds the 10 percentage increase in tariffs on China. 

“This provides a comparison to the above three scenarios in which tariffs increase. Under this scenario, core PCE inflation decelerates to 2.3 per cent YoY in December this year and Q4/Q4 real GDP growth remains relatively stable at 2.3 per cent,” it said.