Smacked by Trump's higher tariffs, pressure on India intensifies

Even smaller countries focussed on low-end manufacturing in Asia such as Cambodia (49 percent), Bangladesh (37 percent), and Sri Lanka (44 percent) have been included. Tariff imposed on Vietnam, a major manufacturing powerhouse with significant trade linkages to the rest of the Asian exporting countries (such as Singapore, Korea, Malaysia, Taiwan, Thailand, China), is at 46 percent. Such tariffs will likely also have some ripple effect on suppliers of inputs to Vietnam.

Trump has the modification authority to increase the tariff if trading partners retaliate, or decrease the tariffs if trading partners take significant steps to remedy non-reciprocal trade arrangements and align with the US on economic and national security matters.

Upasana Chachra, chief India economist, Morgan Stanley, sees downside risks to growth both from the direct and indirect channels. She cautions of a slowdown in US growth and that weak global trade momentum will impact external demand. “We expect the impact to be more pronounced through the indirect channel of weaker corporate confidence, which will dent the risk appetite and further defer the capex cycle,” she adds.

The US is one of the largest trading partners of India, with bilateral trade of around $124 billion in 2024. Exports from India to the US reached $81 billion, and imports from India to the US amounted to $44 billion, resulting in a trade surplus of $37 billion for India in 2024.

The US is India’s largest export destination, with its share reaching 18 percent in 2024 rising steeply from 13 percent in 2014 and 6 percent in 2006. India’s imports from the US (as a percentage of total imports) have remained stable at 6 percent in 2024 compared to 5 percent, a decade ago in 2014.

However, Neeraj Chadawar, head of research, Axis Securities, feels tariffs imposed by the US will have a limited direct impact on India as higher tariffs have also been imposed on other competing countries. “In the near term, select sectors may face challenges in terms of volume, margins and growth. Over the next few weeks, it will be crucial to monitor any retaliatory tariffs by other countries and developments in country-level bilateral agreements,” he explains.

Also read: Southeast Asia in a Trump 2.0 world

US recession pressure: India fallout 

While the higher tariffs are already bringing back memories of higher inflation and recessionary pressures, the impact on emerging markets like India is not spared either. “Trade-led US recession takes everyone down. There is no real winner—not even relative,” says Madhavi Arora, chief economist, Emkay Global Financial Services. 

She elaborates that now the US recession probability rises dramatically. Persisting trade-tariff noises and policy uncertainty will shape things for the worst and create a hostile environment for investment spending.

“Higher tariffs will imply some combination of lower US corporate profit margins and higher consumer prices. The journey of the US economy will flow from the recent goldilocks to stagflation in the coming quarters to possibly dis/de-inflationary impulse, led by permanently lower output. This channel could play out over a year. But over this period, Fed’s policy choices will get complicated with too many moving parts,” Arora adds.

Other concur about the fears of rising risk of inflationary pressure and slowing economic growth even in India as a spillover effect. Chachra sees a downside risk of 30 to 60 basis points to the Indian economy growth estimate of 6.5 percent for FY26. “The impending trade deal with the US remains key to monitor, in our view, the implementation of which by the fall of 2025 could help reduce the downside risk from the direct impact of higher tariffs,” she says.

Earlier, even Goldman Sachs had warned of a recession in the US. It had said that the US economy faces a growing risk of a recession as surging tariffs threaten to stunt growth, reignite inflation and lift unemployment. Goldman Sachs also adds that it is now seeing a 35 percent chance of a recession in the next 12 months, much higher from the 20 percent it expected previously.

Easy monetary policy? 

There is a growing expectation that the Reserve Bank of India (RBI) may reduce interest rates to support amidst a retaliatory higher tariff environment. 

Abhishek Bisen, head-fixed income, Kotak Mahindra AMC, explains that the reciprocal tariff imposed by Trump may dampen India's external demand. With GDP growth already slowing, this could further strain economic performance. “We anticipate further rate cuts and continue positive liquidity measures, reflecting the RBI's commitment to resilience and growth,” he says.

The RBI had lowered the policy repo rate to 6.25 percent in February and subsequently injected durable liquidity into the banking system to support growth. By maintaining surplus liquidity and ensuring robust credit flow, the RBI aims to stabilise financial markets and shield the economy from global uncertainties, such as trade tensions.

On the monetary policy, Chachra expects the Indian central bank to cut rates by 25 basis points and also sees that on the back of an uncertain external demand environment, the RBI will change its stance to ‘accommodative’ in the policy review on April 9.

Further, on the back of downside risks to growth she sees risk of a deeper rate easing cycle, with additional rate cuts of 50 to 75 bps (versus base case of 75 bps rate cut) as the RBI will likely need to support domestic demand. In case of pronounced downside risks to growth, she expects policy makers to pause fiscal consolidation and increase capex spending to support domestic demand.

The higher-than-expected tariffs also reinforce the views of economists at Barclays of three more rate cuts by the RBI to a terminal rate of 5.5 percent.

“India's domestic orientation may offset some of the pressure from large reciprocal tariffs, while the possibility of a bilateral trade agreement suggests tariffs may eventually be reduced for the economy. However, ultimately, weaker global growth and the downside effects of US tariffs on exports—even if temporary—suggest the RBI will likely remain on an easing track,” they say.

The potential now for a severe negative shock to global economic growth implies that the possibility of a much deeper monetary policy easing cycle has become real. “Risks are clearly tilted towards central banks reacting more aggressively and proactively than we expect,” say economists at Barclays.

Considering the inflationary impact of the elevated tariffs, Hitesh Suvarna, analyst, JM Financial Institutional Securities, also expects the Fed to maintain status quo in May, while factoring in a 50 bps rate cut in 2025. Suvarna expects the RBI to deliver another 25 bps rate cut in April, as elevated tariffs would prove to be a drag on domestic growth.

Equities: Still volatile

Markets worldwide were already on tenterhooks on jitters of a reciprocal tariff imposed by the US. While the final reveal of the quantum of tariffs on April 2 brings clarity, equities are expected to remain volatile as risks continue to build on.

“Markets might see a tactical bounce on any sharp moves down, but a sustained move higher does not appear likely to us for now. If anything, we are inclined to fade any bounce in stocks,” says Seth.

According to Seth’s estimates, the impact of slower top line and margins due to higher tariffs will have an effect on Asian earnings. “Ultimately, we continue to believe these risks need to be adequately reflected in valuations, and we do not think we are currently at a stage where we can say with much confidence if this is the time to add to risk to build on longer-term positions,” he says. Seth is concerned that Asian stocks will likely have to go lower before we reach a stage where risk-reward becomes decisively more favourable for Asian equity investors to go on some bargain hunting.

Indian markets have been under tremendous pressure in the last few months while bouncing back in March. After five consecutive months of decline, the 50-share index Nifty gained 6.3 percent in March, the highest since July last year. Even the consistent drainout of foreign institutional investors (FIIs) money flew back to Indian equities in March. In the month, FIIs invested $0.2 billion in Indian stocks while domestic institutional investors inflows were at $4.3 billion.

However, with investors getting nervous on the US tariffs, Indian markets may see panic selling once again.

“In the near term, macroeconomic risks such as trade policy uncertainty, the risk of a global market slowdown due to reciprocal tariffs, and recessionary concerns will continue to challenge market direction. Going forward, we expect market positioning in India to be divided between domestic-facing and export-facing sectors,” says Chadawar.

At this juncture, the risk-reward balance appears to favour domestic-facing sectors due to minimal impact from reciprocal tariffs, while export-oriented sectors will remain in a wait-and-watch mode, contingent on further developments and their impact.

Sectoral favourites & misses 

India’s top exported items to the US are electronics (15.6 percent of total exports to the US), gems and jewellery (11.5 percent), pharma products (11 percent), machinery for nuclear reactors (8.1 percent) and refined petroleum products (5.5 percent). India’s top imported items from the US are energy commodities like crude oil, natural gas and coal (30.7 percent of the total imports from the US), pearls/precious stones (11.8 percent), machinery (9.5 percent), electronics (6.8 percent), and aircraft and parts (4.6 percent). 

Since import duties apply to all trading partners, the extent of impact will vary across sectors and countries based on competitive advantages.

According to Trideep Bhattacharya, president and chief investment officer-equities, Edelweiss MF, it is a relief for now as there is no incremental adverse impact on large exporting sectors like IT services, pharma and autos. The development is slightly better for India in terms of improving relative competitive advantage versus her Asian peers, but it increases recession-related fears in the US over time.

The US has exempted pharmaceuticals from reciprocal tariffs, given its focus on enhancing availability of affordable medical care for US citizens. India exported $8 billion of pharma products to the US in FY24, its largest export destination, and supplies 40 percent of generics consumed in the US. India has more than 650 manufacturing facilities approved by the US Food and Drugs Administration, the second-highest number outside the US. They account for a quarter of all such certified facilities outside the US.

However, Anuj Sethi, senior director, Crisil Ratings, feels that the possibility of tariffs being imposed by the US on pharmaceuticals at a later stage cannot be ruled out. “That said, several potentially mitigating factors—ongoing drug shortages in the US, the higher cost of domestic pharmaceutical production in the US, and declining profitability of US pharma firms—are expected to be taken into consideration before any such imposition,” he says.

Others agree. “Assuming a 10 percent tariff on pharma products, we expect the impact to be negligible. With the sector exempted from reciprocal tariffs currently, we expect a relief rally for the Nifty Pharma Index, after its 11 percent year-to-date decline,” says Tausif Shaikh, analyst, BNP Paribas Securities.