FII flows will be hurt as US announces 25% tariffs on Indian goods; volatility expected to rise: Experts
US President Donald Trump has announced that the country will impose a 25% tariff on Indian goods starting August 1, mirroring the policy signaled earlier on April 2, dubbed 'Liberation Day'. The rate is notably higher than the overall average US import tariff of 18%, and is only below that of China (55%) and Bangladesh (35%) among major emerging markets.
India's goods exports to the US, which stand at around $87 billion (roughly 20% of India's total exports and 2.5% of GDP), are likely to be impacted. Key export sectors such as textiles, pharmaceuticals, electronics, agriculture, and machinery are particularly vulnerable. Export hit may be manageable—but the bigger story is global
Nuvama's analysis suggests that while the direct hit to exports could be partially cushioned by redirecting shipments to other countries and through benefits from the recent INR depreciation, the bigger threat lies in the indirect global impact of the US move.
'The tariff-led narrowing of the US trade deficit, amid a weaker dollar and elevated interest rates, could impart a deflationary impulse globally, weighing on trade, earnings, and growth—including in India,' the brokerage said.
This could lead to reduced FII interest in India, especially given lacklustre domestic demand and uncertainty in policy response. Nuvama suggests that further monetary easing by the RBI may be warranted to mitigate the blow to external trade. FII flows at risk; market volatility ahead
The note warns that capital flows into India are now extremely sensitive, particularly in a market where promoter selling is rising and DII flows are slowing.
The sectors most directly exposed to the US in terms of pricing include pharma, auto ancillaries, select industrials, cables & wires, and ceramics. However, the broader risk is indirect—with concerns that FII outflows could hurt small and midcap stocks, and high-beta domestic cyclicals like NBFCs, real estate, and capital goods.
One potential winner from the situation could be the IT sector, which may benefit from INR depreciation and currently attractive relative valuations. Conclusion: Cautious outlook warranted
While the actual export impact of the tariffs might be limited in GDP terms, the spillover effects on FII flows and global demand could be significant. With uncertainty elevated and no clear timeline for trade negotiations, markets are likely to remain volatile, and foreign inflows may soften further in the short term.
Nuvama retains a cautious stance on Indian equities, citing both macroeconomic headwinds and sector-specific risks.
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