The recent tariff imposition by US President Donald Trump towards Chinese, Mexican, and Canadian imports have generated ripples in financial markets globally, with a big impact for India. On one hand, the move can become a booster for India’s exports with its becoming a preferred source, but at a cost, in terms of fluctuations in currency and outflows of foreign funds, and its impact can cause a blow to Indian stocks.
One of the most immediate impacts of Trump’s 25 tariff for goods entering America through Canada and 10 tariff for Chinese goods is a reorientation of global trading dynamics. U.S. buyers will increasingly turn towards India as an alternative source, with companies moving beyond the “China Plus One” model. With one of its biggest exporting nations under tariff, Mexico, its presence in tariff could force companies to go in search of Indian producers at a lesser price.
However, the picture is not simple. India can gain from such a diversion of trade, but at the same time, India can face a re-diversion of excessive output from China, Mexico, and Canada, and face stiff price competition for domestic producers. Besides, uncertainty in international value chains can make India pay a price in terms of increased cost of imports of parts and raw materials, and generate inflationary impulses in India.
The bigger concern for India’s economy is that companies will become apprehensive, putting off capex and investment planning in anticipation of future political uncertainty. India’s private investment, slow in any case, could even suffer for a long duration, detrimental to long-term economic growth.
Rupee Volatility and External Balance
The tariff statement alone has generated significant fluctuations in global currency markets, with a sharp rise in the value of the US dollar. The dollar index rose from 100 to 110 since Trump’s position regarding trade began garnering spotlight in September 2024, and India’s rupee weakened in value from 83.8 to 87.16 over the same period.
Additionally, India’s forex reserves have reduced to $629.56 billion down from $707.89 billion, a reflection of actions taken by the Reserve Bank of India (RBI) in an attempt to stabilize the rupee. As a weakened rupee can make its goods competitive, a weakened rupee can make its imports, its crude and other important goods, even more expensive, and can, therefore, contribute to inflationary pressures.
Impact on Foreign Investment and Indian Stock Markets
A stronger dollar and tariffs have also seen a re-alignment in fund flows abroad. Institutional investors (FIIs) abroad have been net sellers in stocks, withdrawn a record ₹1.78 lakh crore out of stocks and investing a meager ₹11,337 crore in Indian debt segments. As long as the appreciating dollar continues, one can expect even more outflows in stocks, putting even more strain in terms of valuations in the marketplace.
The biggest risk for financial markets in India is that Trump’s tariffs will generate inflation in America, and in a move to counteract that, the Federal Reserve will have to maintain high-interest rates for an extended period, reducing the chance for a rate cut, and make US assets even more competitive and generate continuous fund outflows for emerging economies, including India.
So far, Indian stocks have weathered the downturn with healthy retail buying, but fundamentals have begun to erode with slowing earnings growth, below-consensus government outlays, and sharp plunges in momentum stocks. As long as uncertainty in abroad continues and earnings don’t deserve current valuations, retail investors in India will become apprehensive, and that will impact performance in the market.
Silver Lining: Strengthening India-US Trade Relations
Despite these risks, one positive takeaway is that India is not included in Trump’s initial tariff list. This presents an opportunity for New Delhi to strengthen its trade ties with Washington, potentially negotiating better market access for Indian exporters. If India can position itself as a reliable trade partner for the US, it may benefit from preferential trade agreements in the long run.
Final Outlook
Trump’s tariffs have created both risks and opportunities for the Indian economy. While export-driven industries may gain from shifting trade dynamics, currency depreciation, inflationary pressures, and foreign fund outflows pose major challenges. In the short term, Indian markets will likely remain volatile, with investor sentiment driven by global economic conditions, US monetary policy, and domestic earnings performance.
Do you have a news tip for Lakshmishree reporters? Please email us at media@lakshmishree.com
Source: Moneycontrol
News Desk
