Indian Stocks Face Extended Underperformance as US Tariffs Set to Rise to 50%

Indian equities are bracing for continued underperformance against emerging market peers as trade tensions with the United States escalate. The situation is set to worsen with President Donald Trump's administration imposing an additional 25% tariff on Indian imports, effective Wednesday. This move will raise the cumulative levies to a staggering 50%, surpassing even those imposed on China.

Tariff Impact and Economic Consequences

The heightened tariffs are being implemented as a punitive measure against India's ongoing purchases of Russian oil. This development is expected to have significant economic repercussions:

• Citigroup estimates suggest that the 50% tariff rate could potentially reduce India's annual growth by 0.60 to 0.80 percentage points.
• The full-year impact could reach up to 1.00% of GDP, highlighting the severity of the situation.

Market Performance and Foreign Investment

The MSCI India Index has been struggling, lagging behind the MSCI Emerging Markets gauge for four consecutive months. The performance gap has widened to over 15 percentage points year-to-date, marking the worst relative performance for Indian equities in more than two decades.

Foreign investors are responding to these challenges by continuing their outflows from India's $5.30 trillion market. The exodus is driven by multiple factors:

• Escalating tariff risks
• Slowdown in economic growth
• Downgrade in corporate earnings expectations

Corporate Earnings and Sectoral Pressures

Recent quarterly results have shown weakness across various sectors:

• Banks and IT firms are expected to remain under pressure
• This is despite Prime Minister Modi's efforts to stimulate the economy through consumption tax cuts

Government Fiscal Measures and Market Reaction

The Indian government's tax reduction plan, while aimed at boosting consumption, has raised concerns about the fiscal deficit. This has triggered a selloff in local debt markets:

• Benchmark yields have risen by 22 basis points this month

Global Investment Trends

As foreign investors extend their equity selling into a second consecutive month in India, there's a noticeable shift in global investment preferences:

• Chinese stocks are regaining favor among international investors

Conclusion

The Indian equity market faces a challenging period ahead as it grapples with the impact of increased US tariffs, economic headwinds, and shifting global investment patterns. The government's fiscal measures, while intended to stimulate growth, have added to market uncertainties. As these developments unfold, investors will be closely monitoring India's economic indicators and policy responses in the coming months.