Stocks of textiles, pharmaceuticals, and automotive component companies—key Indian exporters—are likely to be hurt the most, said experts. However, they also expect the fall to be short-lived on hopes of a trade deal eventually being struck. India and the US are negotiating a bilateral trade agreement, and the next set of talks are scheduled in August.
The benchmark Nifty, which fell 3.1% over the past four weeks to 24,837 last Friday, recovered marginally to 24,855.05 on Wednesday. The tariff announcement came after the markets closed and could result in investors taking fresh bearish positions.
Market brace for impact
The market was expecting a 20% tariff. However, an additional 5 percentage point tariff rate along with an unquantified penalty “could result in a knee-jerk reaction”, said Swarup Mohanty, CEO of Mirae Asset Investment Managers, which manages ₹2 trillion. “But things will begin to stabilise sooner than later as a large part of the uncertainty is out of the way. It’s a negotiating tactic and we could reach a deal soon.”
Read more: US tariffs, penalties may impact India’s oil supplies, lift global prices
Options traders had baked in a 1% move from 24,900 in the Nifty, with a range of 24,780-25,020, at Wednesday’s closing. That range is now likely to break on the downside after the tariff announcement.
In the past four weeks, the markets were already under pressure as a weakening rupee and higher stock valuations than other emerging markets prompted foreign portfolio investors (FPIs) to pull out over ₹32,000 crore from Indian equities in July — a sharp reversal from their buying trend last month. The rupee declined 2.2% over the past month—from 85.49 on 27 June to 87.42 against the US dollar on Wednesday—to its lowest level in five months.
The fiscal first-quarter earnings of Indian companies have also been weak. Consolidated profits of 704 companies fell 6.2% over a year earlier. The Nifty trades at a price-to-earnings multiple of 22.8 times on a trailing basis, compared to 14.21 for the Kospi index. Not only is the Korean market the best performer in Asia, it also closed Wednesday at a four-year high. The Nifty at Wednesday’s closing is almost 6% off its record high of 26,277.35 on 27 September 2024.
Still, money managers such as Ashish Gupta, who oversees assets of ₹3.37 trillion as chief investment officer at Axis Mutual Fund, believe that there could be at best a short-term knee-jerk reaction.
“DIIs (domestic institutional investors) will continue to buy at lower levels, which will cushion any fall,” he said.
To be sure, while FPIs have sold cash shares worth ₹1.32 trillion in the year to date, domestic institutional investors have purchased shares worth ₹4.12 trillion over the same period.
Read more: US tariffs cloud outlook for Indian exports, trigger growth concerns
One area of concern for FPIs is the weaker local unit, which dents their dollar returns. With the tariff tensions persisting, the rupee could weaken a tad more before the Reserve Bank of India intervenes to keep it within a range of 86-87 in the month ahead, according to Madan Sabnavis, chief economist at Bank of Baroda.
“The stock market reaction to the tariff imposition won’t be longer than a few days,” added Sabnavis.
Still, some economists expect the higher-than-expected tariff to hit India’s GDP growth.
“When the US had initially imposed tariffs, we had lowered our forecast of India’s GDP expansion to 6.2% for FY2026, presuming a tepid rise in exports and a delay in private capex,” said Aditi Nayar, chief economist at ICRA Ltd. “The tariff (and penalty) now proposed by the US is higher than what we had anticipated, and is therefore likely to pose a headwind to India’s GDP growth. The extent of the downside will depend on the size of the penalties imposed.”
What’s also worrying economists is that the 25% rate for India is higher compared to the lower rate for peers such as Vietnam, Indonesia and the Philippines. India competes with these countries “in a similar category of labour-intensive products and electronic goods”, said Garima Kapoor, economist and executive vice president, Elara Capital.
“In response to President Trump’s recent imposition of a 25% tariff and penalties on Indian goods, investors will reassess their strategies with a mix of caution and optimism,” said Utsav Verma, head of research-institutional equities, Choice Broking. Sectors like textiles, pharmaceuticals, and automotive components—key Indian exports—are likely to be most impacted and may see reduced investor interest in the short term, he said.
Dipti Sharma contributed to the story.
