Who is afraid of tariffs?
Uncertainty and unpredictability spook investors. While India has plenty to worry about in the first quarter, Trump’s tariffs played a major role in deepening the uncertainty even further. It all started with President Trump, who in his speech proposed raising tariffs on all imports into the USA.
In his inaugural address on 20 January, Trump said: “I will immediately begin the overhaul of our trade system to protect American workers and families. Instead of taxing our citizens to enrich other countries, we will tariff and tax foreign countries to enrich our citizens.” Trump basically wanted the world to fund the US’s mounting deficit, which has grown to $1.3 trillion in the period October-March 2025.
Following up on his speech, Trump went on to levy tariffs on Mexico and Canada initially and subsequently paused them for a month. On 2 April, known as Liberation Day, Trump imposed non-uniform tariffs across 75 countries, including a 27 per cent levy on India. It was announced that these tariffs would come into effect from 9 April. Markets turned jittery, particularly after China and Japan began selling US government bonds. Both the debt and equity markets reacted negatively to the measures. Bond prices fell sharply, pushing yields higher. US stock markets also faced steep losses – an unusual occurrence, as debt and equity markets typically do not move in the same direction. Higher yields made fresh borrowing, including by the government, more expensive. With many US companies operating production bases around the world, investors feared they too could be adversely affected.
Trump eventually paused the effective date, pointing out that “people were jumping and becoming yippee”. He announced a 90-day pause till 9 July on levying reciprocal tariffs for all countries save China. On China, he levied more tariffs in retaliation for that country imposing higher tariffs on US exports, leading to a virtual tariff war brewing between the two countries. The on-and-off levying and pausing of tariffs has not gone down well with the markets.
The Indian stock markets chose to remain neutral in the face of daily pronouncements coming from the US. In the 70-odd trading sessions since 1 January, the markets remained range-bound, with the Sensex moving between 73,000–78,000. Currently, it is below its starting point of 78,507 on 1 January 2025.
While the markets do not believe in the past, it is the future that really sparks interest, with the moot question being what will happen post the 90-day pause. Will countries be forced to come to the negotiating table and thrash out ways and means to cut the trade deficit? Even in the event that some compromise is reached, will the 10 per cent tariff on all imports across the board still stay? Ajay Garg, Founder and MD, Equirus Capital, a full-service investment banker, says: “I feel this is a temporary blip. I do not see the problems gaining traction beyond the 90-day pause period.” This is a view shared by many experts.
Sunil Singhania, founder, Abakkus Asset Manager Funds, an AIF, says: “I do not see a crisis brewing. I expect the issues will be resolved over the next few weeks. Trump is realising that the move is backfiring. Talks with Japan are already on, and a face-saving initiative will probably be found. China is clearly not taking it lightly and the tariff war may escalate for a short time. China will be impacted more than the US, with exports having come to a grinding halt. Both superpowers realise that they cannot live in isolation and some compromise will be thrashed out. However, the trust deficit between the two countries may persist.”
This is the base case scenario. What happens in case the tariffs are imposed in one form or another after the 90-day pause? “Tariffs are less of a worry even if the reciprocal tariffs are put in place after 90 days,” says A Balasubramanian, MD and CEO, Aditya Birla Sun Life Mutual Fund. “Countries will still have to contend with the 10 per cent tariff on all imports to the USA. Indian textiles, pharma and auto ancillary will be the ones which will be impacted.”
Bala, as he is popularly known, adds, “I feel tariffs imposed by the USA will open a Pandora’s box for discussion and negotiation. US fiscal problems cannot be fixed by tariffs. If countries sell US government securities, the bond market will become a problem. Lower bond prices and higher yields will impact the government’s borrowing programme with a higher interest burden. Issuance of bonds will be deferred. Banks’ balance sheets will suffer, posing problems of systemic risks.”
Weakening dollar and rising gold prices
The US dollar has already started weakening against major currencies. In the first fortnight of April, the dollar depreciated by 4.91 per cent against the euro, by 1.91 per cent against the GBP, and by 2.98 per cent against the Canadian dollar. Japan and China are in fact the biggest holders of US treasury bills and bonds. Japan reportedly has an exposure of $1,125 billion, while China has investments of $784 billion, followed by the UK ($750 billion). The others in the top 10 include the Cayman Islands, Luxembourg, Canada, Belgium, France, Ireland, and Taiwan. The US dollar is still the reserve currency, if not for its inherent strength, then for the lack of a stable alternative that commands global trust. Paring exposure also does not work in anyone’s favour. In the event that a country sells even a small portion of a few billion dollars, the lower prices of ensuing bonds – following a sale in a market unwilling to absorb such large quantities – would also tend to depreciate the remaining portfolio.
Many central banks are already increasing their incremental reserves by investing in gold rather than expanding their exposure to US bonds, despite rising yields. The US 30-year treasury bond yield is currently around 4.4 per cent. Gold prices have shot up to nearly Rs95,000 per 10 grams, gaining nearly 6.8 per cent over the 24K price of Rs88,730 on 30 March, with a few experts predicting it could rise to Rs1.25 lakh by the end of this year if global uncertainties remain.
Another fear is de-dollarisation, with countries bypassing the dollar as the global currency and buying and selling goods in their respective currencies, as Russia and China are doing. If Trump becomes too aggressive in implementing tariffs, other countries could also follow suit, notwithstanding Trump’s threat to impose punitive measures on companies deliberately trying to undermine the strength of the dollar.
A third concern is that even the 10 per cent tariffs may stoke inflation if negotiations with major exporters to the US do not end amicably. A shortage of supplies could mean higher inflation, as is already being witnessed in several US cities. If tariffs are passed on to consumers and corporates – as is likely – US exports could become even less competitive, leading to slower export growth, which in turn could increase the trade deficit.
India may benefit
While the US must find solutions for its own impending problems, for India the real issue is how it will cope with the USA’s restrictions. Deven Choksey, founder of DR Choksey Finserv India Private Limited, says: “India, which is largely an inward-looking economy, will benefit from 3Cs and 2Is. Over the last few months, commodity prices have come down significantly, as have crude oil prices. Our currency will also benefit against the dollar, as the rupee inches up. A positive momentum is building up. The two Is relate to inflation, which is inching lower, as are the interest charges. With inflationary pressures under control, RBI is expected to cut interest rates to boost growth.”
Lower prices of crude oil, both in the spot and futures markets, spell good news for India. From $78 per barrel (Dubai Crude, Platts), crude is currently priced at $68. Futures are also showing a weak trend, with expectations of lower demand from China.
While it is difficult to predict the evolving geopolitical environment, India continues to remain in a sweet spot. “India stands out for its domestic consumption story and relatively stable environment. India’s long-term growth trajectory remains intact, driven by favourable demographics, digitalisation, infrastructure expansion, financialisation, and a rising middle class,” says Anand Shah, CIO, PMS & AIF, ICICI Prudential AMC.
Ajay Garg says: “India is on the verge of a consumption rerating. India can be the next big market after China. It can be the alternate market that will be wooed by both China and the USA. Both realise that there is no bigger consumer market than India. Besides, the Indian market, unlike other Asian markets, is not dependent on a single variable. China can offer technology and finance to woo India, as has the USA, which is already offering crude oil to enable India to balance its deficit.”
FIIs also seem to be veering round to the view that Indian markets do indeed offer a better investment opportunity. Even if – and it is a big if – the USA and China are able to trade following negotiations during the 90-day pause period, it may never be ‘trade as usual, as before’, for sure. Both countries will try to diversify their export markets and woo new partners. It may take some time before mutual trust is restored.
A Balasubramanian is also optimistic about India escaping the global slowdown. “India is offering inclusive growth, as a result of which we will stand out. A positive momentum is building up. IT, which is building more infra platforms, will remain stronger. India will in fact benefit from lower commodity prices, including crude. Industries which are looking good include cement – following the increased government spending – consumer durables and auto. Consumption will remain the key driver. With RBI expected to lower interest rates, liquidity will increase. I expect BFSI, utilities and all PSUs, including PSU banks, to do well.”
Ultimately, whatever the macro-opportunities, it will be the investors who drive the market. There is a big debate over whether investors will be able to stay composed and buy when everyone else is selling. “Investors in India are becoming smarter and more mature. There is no panic,” says Choksey. “New money will come to the market. Investors are looking at buying opportunities in these uncertain times. Companies like Reliance Industries, Bajaj Finserv, and Tata Motors are attracting attention at these levels. Amongst other companies we like are Bajaj Housing Finance, and Reliance Jio, which are systematically putting in their building blocks – including retail, telecom, and probably insurance, in the near term.”
Banks and NBFCs are back on the radar of investors. Pinank Jayant Shah, CEO of Capital India Finance Ltd, a BSE-listed NBFC (market cap of Rs1,300 crore) catering to the SME sector, says: “The India story will be realised. NBFCs have gone through numerous challenges over the last few years. The challenges are clearly behind us.” Shah, who has worked with HDFC and Indiabulls Finance, adds: “I am looking at a positive flow for NBFCs. I do not see any depletion in opportunities for SMEs.”
Singhania concurs, saying that FIIs’ renewed interest will favour large caps, while domestic investors will lean towards midcap companies. “I feel small and midcaps are marginally overpriced, and there is no massive alpha to be created by investing at this juncture. Domestic flows will remain positive. People are sitting on lots of cash.” Singhania adds that, ultimately, corporate earnings will drive growth. “Corporate results for this season have been pretty tepid, and the next quarter may be no better,” he says.
“Structurally, we believe India Inc. can sustain an earnings growth rate in line with nominal GDP growth. We expect corporate earnings to benefit from a revival in capital expenditure, both on the government and private fronts – supported by healthy balance sheets and improved operational efficiencies witnessed over the recent year,” points out Anand Shah, CIO, PMS and AIF, ICICI Prudential AMC.
For investors, it pays to invest during every crisis and play the waiting game. One only has to look at how irrationality can push down the prices even of blue chips. Hindustan Aluminium, during the 2008 crisis, was available for Rs32 – as were many other blue-chip stocks. Tata Steel likewise dipped by nearly 75 per cent to Rs220. At that time, the face value was Rs10. Investors should thrive in times of crisis. Buying in small lots can help. For the risk-averse, it is best to spread the risk across various asset classes.
One casualty of the uncertainty is the thriving IPO market. New issues have slowed down considerably in the first quarter of 2025, especially on the main board. Garg observes: “There is no fear psychosis evident amongst companies planning to tap the capital market for funds. The promoters are readying themselves to go in for IPOs. They have already started planning beyond three months.”
The hospitality sector is one that has seen a lot of activity over the last 2 years. Prestige Hospitality is planning to launch an IPO soon. The IPO market may pick up once activity in the secondary market revives. With banks cutting down interest rates on savings accounts, it is best to start putting money to better use. Large-cap equity funds and multi-asset class equity funds should also be considered. Come what may, large Indian companies are unlikely to simply fold. What is required is a steady mind to ride out the crisis and a stomach strong enough to take risks on the India story.