What Trump Tariffs means for the Indian economy and markets

The recent imposition of tariffs by US President Donald Trump on imports from China, Mexico, and Canada has significant implications for the global economy, but two main repercussions for Indian economy and markets. First is the broad impact on Indian manufacturing – the trend of global companies diversifying their sourcing base away beyond China could gain more momentum and become broader as Mexico and Canada also become expensive/risky destinations to import from for the US.

Second big impact, which will make a bigger difference to Indian stock markets, is the dollar strength which is bad news for market as a whole as it means foreign investors will continue to sell India.

Trade diversion opportunities

With the U.S. imposing a 10% additional tariff on Chinese goods and 25% on imports from Mexico and Canada, American importers may continue to seek alternative sourcing destinations. India, has been a beneficiary of the China plus one strategy several multinationals have been pursuing, but with Mexico, the biggest exporter to the US also becoming an expensive and risky destination, there could be tactical export opportunities for India.

However, how this actually plays out is hard to tell as these tariff are feared to trigger a global trade war. This brings with it a few key concerns with contradictory repercussions: One, such uncertainty can disrupt global supply chains, which could be inflationary for the Indian economy as we are still import dependently for a lot of component supplies. The other argument is that the countries facing higher tariffs could threaten Indian industries as these economies look for other destinations to dump their excess capacities. An even bigger concern is local businesses become cautious, delaying investment decisions, which could slow economic growth which is anyway being weighed down by slow capex growth. The lack of “animal spirits” with respect to private investments is unlikely to comeback and may only get delayed with trade tensions escalation.

The silver lining though is that India is not on the initial tariff list, which opens avenues for New Delhi to strengthen trade ties with Washington. This diplomatic goodwill could be leveraged to negotiate favourable terms in future trade agreements, potentially providing Indian exporters with better access to the US market. This we need to still wait and watch.

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Currency volatility and external balance

The tariffs have led to fluctuations in global currency markets, with the dollar rising steadily. Since Trump’s policy stance started to be recognised in financial markets in September, the dollar index has risen from 100 to 110. The rupee has fallen from the September 30 peak of 83.8 to 87.16. During the period, forex reserves have dropped from $707.89 billion to $629.56 billion. The slide in the rupee has been less compared to other emerging markets, nonetheless, in absolute terms a depreciating rupee can increase the cost of imports for India, leading to inflationary pressures. Conversely, it could make Indian exports more competitive, but the net effect depends on the balance between imports and exports and the ability of RBI to defend the rupee.

Impact on foreign fund

This comes as the biggest risk to Indian equity markets. Foreign investors have sold Rs 1.78 lakh crore from in Indian equity markets and bought Rs 11,337 crore in Indian debt markets.

If the dollar strength continues, there could be continued outflows. Trump’s policies on immigration, tariffs, and taxes could lead to inflation and hinder the Federal Reserve’s ability to lower interest rates, triggering continued flows back into dollar-denominated assets. This scenario is detrimental to emerging market assets, leading to outflows and underperformance of equities.

So far Indian markets have held up on the strength of the retail investors continued interest in stocks markets. As fundamentals are now challenged with weaker earnings growth, less-than-expected investment spends by the government, and deep cuts in momentum stocks and overall markets flatlining, retail participation will be the key driver of stock prices. Till earnings come back on track, justifying currently elevated valuations.

Also Read | Budget Impact, Trump Tariff: What to expect in trade today

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