📰India is "Liberated" from U.S. Trade

Good afternoon, 

Welcome to the best way to stay up-to-date on India’s financial markets. We have three important stories about how India moves forward after one of its largest trade partners, the United States, imposes a 26 percent tariff on all Indian imports.

Then, we close with Gupshup, a round-up of the most important headlines.

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—Shreyas, [email protected]

Market Update.

India Gets “Liberated” From U.S. Trade.

The latest move by Trump to impose a 26 percent tariff on Indian exports to the U.S. has sent shockwaves through New Delhi’s economic and political circles. While India has long been on Trump’s radar for its high import duties, this tariff hike — higher than those imposed on Japan, South Korea, and even the European Union — forces India into a corner.  

How did Trump land on 26 percent? Great question! Divide the US’s trade deficit by the amount of imports it gets from that respective country. The White House calculated “tariffs” imposed on the U.S. by another country by dividing the trade deficit it has with a country by the dollar amount of imports it buys, putting India at 52 percent. This is not a tariff, as this doesn’t correlate to any increase in cost on U.S. exports to Indian importers. While India does charge some of the highest tariffs of any major economy, it is closer to an effective 5 percent tariff on imports. However, the United States’ 26 percent tariff on India is real, and will fundamentally alter trade between the two countries (if it stays).

Current risks: India is the US’s ninth-largest trading partner, enjoying a $46 billion (₹3.9 trillion) trade surplus in 2024. The new tariff threatens to shrink Indian exports to the US by up to $33 billion (₹2.8 trillion), potentially wiping out 0.9 percent of India's GDP. The engineering sector, which exports industrial machinery, auto parts, and power equipment, is expected to suffer a $4-5 billion (₹342-427.5 billion) loss in the first year alone.  

With India’s economic growth already slowing to 6.5 percent, forecasted for 2025, the additional strain could push policymakers toward monetary easing, with analysts predicting deeper interest rate cuts by the RBI. 

India has traditionally responded to US trade pressures with a mix of tariff cuts and diplomatic negotiations, but this time, the stakes are higher. The Modi government, which has already lowered tariffs on 8,500 industrial goods, may now have to make further concessions on American agricultural products and energy imports.

A potential benefit for India: While for most countries this is hurtful and will require retaliation, the pressure from Trump could accelerate India's much-needed economic liberalization: 

• Reducing protectionism by cutting some of the various import duties. India has some of the highest duties in the world and this could be cut very soon. 

• Boosting manufacturing since Indian companies will have to compete globally. As Indian firms become more efficient, there could even be more FDI in industries like defense, energy, and electronics.  

• Diversifying trade to other markets like Oceania, the Middle East, and Europe. 

With bilateral trade talks ongoing, India is likely to negotiate sector-specific exemptions while offering new deals to the US on oil, LNG, and defense equipment. Modi’s government may also consider a more market-driven approach to the rupee, making Indian exports more competitive at the expense of a weaker rupee. 

Indian Assets Hold Strong.

Indian assets suffered less than their Asian peers Thursday after tariff measures were perceived as less severe on the nation’s economic growth and corporate profits.

The bright side: The Nifty 50 closed 0.4 percent lower, while the rupee fell less than most emerging Asian peers. The drop in local equities is more subdued than the MSCI Asia Pacific Index, which slid to its lowest level since Feb. 4 at one point during the session before recovering some losses.

This is because neighboring countries like Vietnam and Thailand have been harder hit with tariffs in the 46 percent range. India’s largest competitor, China, received 54 percent tariffs as well. India can also gain more: cutting import duties could make India more global and competitive by removing red tape. 

The risky side: The relative calm in local markets is at odds with concerns that the US levies would further cloud India's economic outlook. Economists at Morgan Stanley warned that their 6.5 percent gross domestic product growth estimate for the fiscal year ending March 2026 is at risk of a 30-60 basis points reduction due to tariffs.

The unpredictability of the duties threatens to unsettle local equities just as they were regaining their footing. The Nifty 50 rallied 6 percent in March to reverse its correction since September. Valuations have also improved, with stocks trading at almost 19 times forward earnings — a welcome and marked drop from previous months, where Indian stocks traded at nearly 25 times earnings. Investors have been buoyed by improving economic indicators, central bank liquidity injections, and expectations of an interest rate cut next week, but tariffs will continue to be the main focus going into this month now. 

Sector outlook: Indian pharma stocks were a bright spot after the sector was unexpectedly exempted from US import taxes — the healthcare gauge rallied 2.3 percent. Europe and the US account for 55 percent of India’s pharma exports, and the EU has no plans to rail against Indian pharma. 

Interestingly enough, small-cap stocks also performed well. Small-cap indices rose 0.7 percent, outperforming other economies and large-cap stocks in India as well.

India Plans to Strengthen Ties with Thailand.

Thailand and India have strengthened their diplomatic and economic ties by signing a strategic partnership aimed at enhancing defense cooperation and accelerating a key infrastructure project linking South Asia with Southeast Asia. During a meeting in Bangkok, Thai Prime Minister Paetongtarn Shinawatra and Modi emphasized the importance of connectivity between the two regions, particularly through the new highway that will extend from northeastern India through Myanmar to northern Thailand.  

Trade talks: In addition to infrastructure, Thailand proposed its ambitious Landbridge project, which aims to establish a new logistics route connecting the Pacific and Indian Oceans. Paetongtarn also advocated for revising India's free trade agreements with Thailand and the ASEAN bloc to encourage greater trade and investment. Modi’s visit to Thailand is particularly significant as it marks the first by an Indian leader in 12 years, reflecting the growing strategic importance of the relationship between the two nations. Interestingly, the talk of trade and interconnectedness comes right as both countries face 25+ percent tariffs to the US.

A larger regional scheme: Beyond bilateral discussions, Modi’s visit coincides with the BIMSTEC summit in Bangkok, where leaders from Myanmar, Nepal, Bhutan, Bangladesh, and Sri Lanka are convening to discuss regional economic cooperation and security. A major outcome of the summit is expected to be the adoption of the BIMSTEC Bangkok Vision 2030, which will outline long-term goals for economic collaboration. Additionally, an agreement on maritime transport cooperation is set to be finalized, further strengthening trade and connectivity within the region.  

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Gupshup.

Macro

• Steel procurement is being tightened to favor domestic mills. A new decree makes it so domestic agencies have to prioritize locally made steel for at least 5 years. The rule comes as cheap imports from China have intensified.  

• The RBI will not do a 14-day repo for this upcoming fortnight. This is because liquidity in the Indian market is expected to widen to $29.2 billion (₹2.5 trillion) after bond purchases and cash injections. The RBI also has not used reverse repo, however, which sucks up excess liquidity. 

• Markets are now expecting 75 basis points of RBI cuts due to the tariff threat. Banks expect to see growth stay around the 6.5 percent level, but inflation will also stay within the target band around 4 percent. Markets are expecting slow cuts of 25 basis points rather than any jumbo cuts larger than that. 

• India's jewelry exports are set for a decline. The industry is worth $32 billion (₹2.7 trillion) with a third of those exports going to the US. The US has hiked jewelry prices effectively by 26 percent and Chinese demand fell earlier to make exports fall to current levels from $36.5 billion (₹3.2 trillion).  

Equities

• Indian VIX showed that traders held off from hedging and betting before tariffs. The put-call ratio (higher when people are hedging equity investments) was also as low as at the beginning of the year. This overall signals a retreat in fear and hedging needs. 

• The defense and consumer staples sectors are expected to rally since they are less affected by a trade war. In particular, consumer staples provide a hedge against any tariff risk India faces since consumers have to buy cheap food, clothes, etc.  

Alts

• ONGC secured a $200 million (₹17.1 billion) loan from Bank of India for global expansion. The loan is seven years long and priced at 124 basis points above SOFR. For ONGC, that is advantageous considering SOFR trades below Indian rates. ONGC also borrowed $400 million (₹34.2 billion) from dollar loans earlier this year and is seeking $100 million (₹8.6 billion) in Samurai bonds (yen-denominated).

• The government is selling its 4.8 percent stake in Mazagon Dock Shipbuilders.The sale will be at an 8 percent discount to the current share price. The government will retain an 80 percent ownership stake in the company.    

Policy

• India's lower house passed the Waqf bill. The bill intends to let the government analyze contracts of Muslim property donated for religious or teaching purposes. If documentation is not official, the government could seize it. The bill still has to pass the upper house and then to Modi’s desk, though he is expected to sign it.  

• India passed a bill making it easier for aircraft lessors to reclaim planes when an airliner defaults. The bill is a landmark change since SMBC could not reclaim aircraft from Indi Go when it filed in 2023. This should bring down the cost of leasing and pass through to consumers with cheaper airfare.  

See you Friday.

Written by Yash Tibrewal. Edited by Shreyas Sinha.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.