Trump's tariffs threaten to deepen India's $248 bn stock market rout

Business Standard

3 days ago

India's faltering equities market faces the risk of more losses after the nation was slapped with one of the highest tariff rates in Asia on its exports to the US.
President Donald Trump said he would impose a 25 per cent levy on Indian goods starting Friday and threatened an additional penalty over the country's energy purchases from Russia. That's a steeper hit than the 15 per cent to 20 per cent range applied on several regional peers.
India's stock benchmark has lagged most major global peers this year amid concerns over a slowdown in its economy and corporate earnings. The underperformance has deepened this month as foreign investors have accelerated their withdrawals, turning attention to cheaper or more attractive markets like Hong Kong and South Korea. The value of India's stock market is down $248 billion since reaching a record on July 2.
'India is known to be a tough negotiator when it comes to trade, and this time the toughness seems to have effected an undesirable outcome,' said Tomo Kinoshita, global market strategist at Invesco Asset Management. 'The 25 per cent tariff should have a moderate negative impact on India's stock market, especially for export sector stocks.'
The MSCI India Index is on track for its weakest month since February. While it has eked out a gain this year, its performance trails the almost 14 per cent jump in MSCI Asia Pacific Index and pales in comparison to the 36 per cent surge in the MSCI Korea Index, which has rallied on optimism surrounding bold reforms under a new president.
Futures contracts on the local benchmark NSE Nifty 50 Index dropped 0.6 per cent after Trump's announcement while the iShares MSCI India ETF slid 1.5 per cent. The situation remains fluid, as the US president later said negotiations with India continue and whether or not a trade deal can be reached will be known 'at this end of this week.'
India's once-lauded relative insulation from global turmoil is losing its shine. With earnings offering few positive surprises and valuations remaining among the highest in the region, investors are likely to stay cautious in the near term. The MSCI India trades at almost 22 times its one-year forward earnings, well above its long-term average and gauges of Chinese and Korean shares.
Even as stocks decline, India's equity capital market is humming. Fundraising from initial public offerings, share placements to large investors and block trades has topped $6 billion for a third straight month. That level of issuance — last seen in late 2024 — coincided with a double-digit correction in local shares.
'High valuations and slowing profits are inverting buyer-seller incentives,' said Prateek Parekh, a strategist with Nuvama Institutional Equities. Business founders and private equity investors are on a 'selling spree,' while domestic flows are slowing. 'Foreign fund flows are now critical.'
That boost will be key, as foreign investors — who have withdrawn more than $2 billion from local shares this month — weigh whether earnings can justify the rich valuations. The April-June results season so far has done little to ease concerns. Earnings from key technology and financial firms, the two sectors that together make up about 40 per cent of the market's value, have largely underwhelmed.
Yet some believe the tide could still turn. Interest-rate cuts and a pick-up in economic growth could end the 'flat-to-weak' positioning of local stocks and lay the foundation for an earnings rebound in the second half of the year through March, according to Emkay Global Financial Services' strategist Seshadri Sen.
Rahul Chadha, founder and chief investment officer at New York-based Shikhara Investment Management LP. Chadha, said his fund has raised exposure to Korean stocks in recent months due to benefits including improved corporate governance.
'Honestly, 2025 looks challenging for India to close the performance gap,' he added.