Trump's imposition of tariffs stirs up turbulence for the Indian rupee and stock market, casting doubt on the country's economic growth prospects.
India is facing the brunt of increased U.S. tariffs on its goods, with analysts warning that these tariffs could hamper growth in India's economy. The tariffs, currently at 25% with threats of further hikes, could reduce India's GDP growth by about 0.3 percentage points.
The tariffs have already triggered negative financial market reactions in India. The BSE Sensex and Nifty 50, India's benchmark equity indices, fell about 0.6% each. Moreover, the Indian rupee (INR) depreciated against the dollar, increasing costs for imported goods and causing inflationary pressure.
Alison Shimada, head of Total Emerging Markets Equity at Allspring Global Investments, stated that the direct macroeconomic impact may be limited given India's exports to the U.S. account for just 2-3% of GDP. However, the tariffs make Indian goods more expensive for American buyers, likely leading to reduced demand and loss of market share to competitors like Vietnam and Bangladesh.
The ongoing trade tensions could also unsettle investor sentiment, causing foreign institutional investors to pull back capital and exacerbate market volatility. In response, the Indian government and the Reserve Bank of India (RBI) could adopt several measures.
One such measure is diplomatic and trade negotiations. India can intensify diplomatic efforts to reverse or ease tariffs, including engaging in dialogue with the U.S. to address concerns such as India’s purchase of discounted Russian oil, which was cited as a key reason for the tariff imposition.
Another measure is the imposition of counter-tariffs on U.S. goods. This could signal firmness and protect domestic industries, but it risks further escalation in trade tensions and could impact U.S. companies operating in India.
The RBI might also intervene in foreign exchange markets to stabilise the currency, adjust interest rates to manage inflation, and reassure foreign investors to maintain capital inflows.
The government could provide fiscal support, subsidies, or incentives to sectors most affected by U.S. tariffs to sustain competitiveness and explore alternative export markets to reduce dependency on the U.S.
Accelerating efforts to diversify trade partnerships with other countries and regional blocs could also help mitigate the impact of U.S. tariff increases and reduce concentration risk in export markets.
The rupee is close to its record low of 87.95, and elevated policy uncertainty in the U.S. can cause Indian firms to postpone investment decisions. Goldman Sachs economist Santanu Sengupta estimated a 30-bps hit to growth once the tariffs are imposed. The tariffs could reduce India's growth in 2025-26 by up to 40 basis points.
DBS Bank suggests that downside risks may be offset by fiscal support for labor-intensive industries and smaller exporting firms. Despite limited tariff arbitrage, DBS Bank believes the economy will continue to benefit from trade diversion flows as manufacturers diversify and derisk from other production bases.
The ongoing earnings season in India remains a significant focus for investors. Shimada emphasized that fundamentals will remain a key focus since India's earnings season is ongoing. Shimada predicted that the stock market may react negatively in the short term as the Indian rupee (INR) is depreciating on the back of this news.
India could consider increasing imports from the U.S. to ease tensions. However, this would depend on the U.S. willingness to lower or remove tariffs on Indian goods. The Indian government expects the economy to grow at 6.3%-6.8% in 2025-26. Whether these predictions hold true in the face of increased U.S. tariffs remains to be seen.
The tariffs have triggered negative financial market reactions, with the BSE Sensex, Nifty 50, and Indian rupee (INR) being affected. (business, finance)
The ongoing trade tensions and potential tariff increases could cause foreign institutional investors to pull back capital, potentially exacerbating market volatility. (politics, general-news)
