Markets bleed as Trump escalates fears of a global trade war

However, economists still expect reaction of markets screaming of a sell-off across the globe may have a trade war de-escalation impact. “Trade war de-escalation is more likely to occur because of negative feedback from markets or the real economy. Since economic data is typically lagged and noisy, market pressure seems the most plausible path to a quick trade resolution,” says Jeremy Schwartz, senior US economist, Nomura.

Schwartz explains that considering Trump’s negotiating style, there is likely to be an ebb and flow of escalation and de-escalation. “Trump has indicated a willingness to look through equity market weakness and inflation pressure though, and his actions in his first term make us sceptical that market pressure will force a quick resolution to trade conflicts,” he adds.

A reciprocal tariff by the US could significantly impact India’s balance of trade if New Delhi is not able to negotiate any alternative deal. The US accounts for 17.7 percent of India's goods exports. Weighted average tariff rates imposed on US imports (by India) is at 8.5 percent (adjusted for reduction in the recent Budget). This compares to tariff rates imposed by the US at 3 percent, according to the World Integrated Trade Solution database. AHS weighted average tariff rate is applied weighted average tariff which is the average of tariffs weighted by their corresponding trade value.

Pranjul Bhandari, chief economist, India and Indonesia, HSBC Global Research, sees a positive in the potential trade war. “One positive from the potential US trade tariffs is that they could become a catalyst for change, but reforms must run deep,” she says.

Bhandari explains the potential US tariffs may result in lowering import tariffs, opening up to regional foreign direct investment (FDI), fast-tracking trade deals, and making the Indian rupee more flexible. “And India does not have to look too far for models to emulate. Its success in services exports has demonstrated the power of moving up the value chain, from basic (example, call centre services) to high-tech (professional services),” she says.

As of FY24, India’s export to the US accounts for 2.2 percent of the GDP. The US is India’s largest export destination, with the India-US trade surplus rising to a high of $38 billion in 2024 from $31.2 billion in 2023, according to estimates by Nomura. India’s trade surplus with the US moderated somewhat during Trump’s first stint as president; it has picked up sharply since and reached a high in 2024.

Key exports to the US include electrical/industrial machinery, gems & jewellery, pharmaceuticals, fuels, iron & steel, textiles, vehicles, apparels, and chemicals, among others, of which iron & steel and aluminium account for nearly 5.5 percent of the total.

Also read: Southeast Asia In A Trump 2.0 World

Indian markets, macro: Where is the bottom? 

In tandem with the rest of the world, Indian equities have been on shaky ground since the beginning of 2025. What seemed like a ‘golden era’ of Indian markets is sending shockwaves to investors, especially in equities. Around 15 percent loss of benchmark indices from the record highs hit in September last year is not for the faint-hearted. In February alone, the Sensex and Nifty slumped nearly 6 percent while BSE Mid and Smallcap indices lost 10 to 14 percent. A reality check for those who entered the equity markets during Covid to make quick bucks off the table.

Sahil Shah, CIO and fund manager, Equirus Asset Management, feels the markets are hovering near the bottom, as lower earnings growth has already been factored into stock prices. “Additionally, uncertainties related to tariffs have been absorbed into the valuations of export-oriented sectors. While short-term fluctuations are possible, the bulk of the downside appears to be behind us,” he says.

Shah argues that a turnaround in Indian markets could be driven by multiple factors, including an infusion of liquidity by the Reserve Bank of India (RBI) and clarity on tariff-related uncertainties, both of which could bolster investor sentiment. However, the most crucial catalyst remains earnings growth. “The current trajectory of 5 to 7 percent earnings growth needs to accelerate to 14 percent and beyond. Until the earnings downgrade cycle stabilises and an actual growth rebound materialises, market movements may remain range-bound with a sideways trend,” Shah adds.

The Indian market has underperformed most global markets in the past 12 months. Foreign institutional investors (FIIs) continued to sell Indian stocks. In February, they offloaded Indian stocks worth $5.4 billion, while domestic institutional investors were net buyers of $7.4 billion, marking the 19th consecutive month of inflows.

Despite the sell-off, several stocks and sectors continue to trade at a premium to their historical average multiples. The Nifty is available at price-to-earnings (PE) at 18.8 times and 16.4 times based on earnings of FY26 and FY27 respectively.

“We believe most sectors and stocks are still trading at premium valuations, with the degree of overvaluation rising in inverse correlation to market capitalisation, quality and risk,” says Pankaj Kumar, analyst, Kotak Securities.

Agrees Shah. "Valuations have become more reasonable across the board but are not yet at deeply discounted levels. That said, select pockets of value are emerging, particularly in lending financials, export-driven businesses, and select consumption-oriented companies, many of which are trading below their historical valuation averages," Shah adds. 

Meanwhile, India’s real gross domestic product (GDP) was at 6.2 percent YoY in the December-ended quarter. This compares to 5.6 percent YoY and 6.5 percent YoY in the previous two quarters. The growth pick-up in the December-ended quarter was largely led by a household consumption recovery (primarily on revived rural demand) and a higher contribution of net exports, even as fixed capex growth remained soft. On the industrial side, growth was supported by robust agriculture output and improved manufacturing growth in the December-ended quarter. Nominal GDP grew 9.9 percent YoY in the December-ended quarter.

Tanvee Gupta Jain, economist, UBS, expects India’s FY26 real GDP growth to stabilise at 6.3 percent YoY but to remain below consensus (6.5 percent YoY), building in an uncertain global backdrop (especially US trade policies and the risk of reciprocal tariffs on India).

India's Manufacturing Purchasing Managers’ Index slipped to 56.3 in February 2025, its 14th-month low. This compares to 57.7 in January. The data compiled by S&P Global and released by HSBC shows the decline was led by weaker growth in output and sales.

Due to trade war threats as US imposed higher tariffs on Mexico, Canada and China, Brent crude slipped to a multi-year low at below $70 per barrel on March 6. A low price of Brent crude typically augurs well for the Indian economy as the country imports most of its oil requirements. In addition to that, it eases pressure on those companies’ margins which depend heavily on oil for manufacturing of products.

“A combination of demand worries, rising production from non-OPEC countries and impact being seen of geopolitical events (hope of some compromise in Russia-Ukraine, Israel Hamas Ceasefire) has been keeping a tight lid on crude prices in recent months. OPEC’s decision to bring so many additional barrels to the market just adds to supply comfort over the next 12 to 18 months. Irrespective of which demand forecast plays out over 2025, supply runs ahead of demand in all scenarios, implying crude prices shall remain subdued at below $70 per barrel levels over the next 12 months,” say analysts at ICICI Securities.