Economic sanctions imposed by Trump send shockwaves through the Indian rupee and stock market, casting doubt on the country's growth prospects
The Indian economy is facing a potential setback as the U.S. President, Donald Trump, announced steeper-than-expected tariffs on Indian goods. These tariffs, expected to be 25%, could negatively impact India's economic growth, according to analysts and economists.
The tariffs are predicted to reduce GDP growth by about 20 to 40 basis points (0.2–0.4%), potentially lowering growth to below 6% in the current fiscal year. This is based on estimates by Goldman Sachs economist Santanu Sengupta and DBS Bank economists.
The impact will be particularly felt in sectors like pharmaceuticals, electronics, and gems and jewellery, where Indian exporters will face increased costs. This could reduce earnings for Indian companies and dampen export growth.
The news of the tariffs has already caused volatility in the Indian stock markets, represented by the Nifty 50 and BSE Sensex, which fell about 0.6% each. Alison Shimada, head of Total Emerging Markets Equity at Allspring Global Investments, suggests that the stock market may react negatively in the short term due to the depreciation of the rupee on the back of this news. However, she notes that fundamentals will remain a key focus since India's earnings season is ongoing.
The rupee is also likely to face depreciation pressure due to worsening trade conditions and reduced foreign exchange inflows from exports to the U.S. The rupee has already declined to an over five-month low of 87.74 and is close to its record low of 87.95.
The imposition of tariffs has already contributed to turmoil in global markets with declines in U.S. stock indices. Similarly, the tariffs could dampen investor sentiment in India.
Shimada also suggests that India could consider increasing imports from the U.S. to maintain constructive trade relations with both Russia and the U.S. However, elevated policy uncertainty in the U.S. can cause Indian firms to postpone investment decisions.
DBS economists believe that the economy will continue to benefit from trade diversion flows as manufacturers diversify and derisk from other production bases, including China. If these tariffs remain, they could undermine India's growing appeal to businesses in low-value-added manufacturing sectors.
Despite these challenges, the Indian government expects the economy to grow at 6.3%-6.8% in 2025-26. However, this expectation was not mentioned in earlier bullet points.
In summary, increased U.S. tariffs are expected to modestly reduce India's GDP growth, create negative sentiment in equity markets such as the Nifty 50 and BSE Sensex, and exert depreciation pressure on the Indian rupee due to trade disruptions and reduced export earnings. If these tariffs remain, they could undermine India's growing appeal to businesses in low-value-added manufacturing sectors.
The unexpected tariffs imposed by the U.S. President, Donald Trump, on Indian goods could have a substantial impact on business sectors like pharmaceuticals, electronics, and gems and jewellery, with increased costs potentially reducing earnings for Indian companies and dampening export growth. The volatility in the Indian stock markets, as represented by the Nifty 50 and BSE Sensex, is a direct reflection of the negative sentiment in the financial world, with a potential depreciation of the rupee due to these tariffs.
