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Informist, Thursday, Apr. 3, 2025

 

By Aaryan Khanna, Pratiksha and Anshul Choudhary

 

NEW DELHI – The reciprocal tariffs that US President Donald Trump's administration announced early Thursday had been in the works for over a month and were harsher on India than analysts had feared. However, domestic equity, debt and foreign exchange markets have largely shrugged off the impact, with traders trying to get a hang of the macroeconomic risks before readjusting their portfolios.

 

Opting for a discounted reciprocal approach, Trump said his administration would charge half the tariffs imposed by a country on US imports. Information on the White House website showed the adjusted reciprocal tariff on India to be 27%, even though Trump announced a rate of 26%.

 

"India's currency and equity markets have reacted mutedly to the tariff announcement," ANZ Bank India said in a note. "The rupee could remain on a gradual depreciation path going forward. The downside risks to growth unequivocally call for a stronger policy support."

 

The stock market was expected to be the worst-hit, with US S&P 500 e-mini futures down over 3% Thursday. Asian equities also slumped, but the reaction in Indian equities was muted. On the currency front, though the cues from emerging markets were mixed, the rupee reversed all losses to end higher. With growth and policy easing expected in both the US and India, gilt yields fell early in the day following US Treasury yields. However, the 10-year gilt yield ended higher Thursday largely due to domestic factors.

 

Traders expect the tariffs to weigh on India's growth while not significantly adding to inflation, but the extent of the impact was unclear. Economists pegged the impact of the expected reduction in exports alone, without further cross-border retaliatory tariffs, at 0.4-0.9% of India's GDP.

 

India's trade ministry said it was currently examining the implications of the reciprocal tariffs. Investors across markets will now look to the Reserve Bank of India's estimates on growth and inflation, which will be part of the Monetary Policy Committee resolution next week.

 

EQUITIES

Equity markets in India were largely unfazed by the US tariffs. While the benchmark Nifty 50 ended 0.4% lower on Thursday, this was better than the global peers in Asia and Europe, where several markets fell over 2%.

 

While the tariffs on India were higher than expected, the market is hopeful that these tariffs will come down once India reaches a trade deal with the US, analysts said. Market watchers said there is a silver lining amid the tariff threat as higher tariffs on other Asian countries such as China, Vietnam, and Bangladesh may prove to be beneficial for Indian companies. 

 

"Higher US tariffs on India's competitors can help India gain market share over the long term in certain segments like textiles," said Sakshi Gupta, principal economist at HDFC Bank. The adjusted reciprocal tariffs on China, Vietnam and Bangladesh were 34-46%.

 

Further, the exemption for pharmaceutical products from the tariffs led to a sharp rise in these stocks which helped cushion the impact from the sharp sell-off in information technology stocks. 

 

RUPEE

The rupee displayed resilience against the dollar after the unfolding of the much-awaited event. After falling sharply to 85.76 a dollar earlier in the day, it erased all of its losses and went on to settle at an over three-month high of 85.43. 

 

Market participants said a slump in the dollar index on the back of growing concerns around US growth and a relatively lower tariff rate on Indian goods compared to other emerging markets helped the Indian currency. The dollar index, which measures the strength of the dollar against a basket of six major currencies, slipped over 1.5% on Thursday.

 

"A lot of the tariff impact was priced in already by the market, which is why there was a minimal impact (on the rupee)," said a senior treasury official at a large state-owned bank. "There are also chances that some of these tariffs may be cancelled after the trade negotiations."

 

According to ANZ Bank India, the recent surge in the rupee largely unmitigated by the RBI, created room for the exchange rate to absorb the tariff shock without rising to levels that could constrain monetary policy. The rupee rose almost 2.3% against the dollar in March, logging its biggest monthly gain in over six years. 

Further, foreign portfolio inflows into the Indian debt market owing to the growing expectation of a rate cut by the RBI's Monetary Policy Committee on Wednesday also boosted the local unit, dealers said. 

 

GOVERNMENT BONDS

For government bonds, the immediate joy was triggered by the overnight fall in US Treasury yields, with the 10-year US yield hitting its lowest level since early October. The 10-year gilt yield fell nearly 3 basis points at the open, but profit booking kicked in when it approached the psychologically crucial 6.45% mark.

 

The impact on gilts was limited as the tariffs only made the case stronger for monetary policy easing, which the market had broadly factored in. Gilts have priced in the MPC cutting the repo rate by 50 basis points to 5.75% by the end of 2025, while also changing its stance to 'accommodative' from 'neutral' on Wednesday. Pricing in further cuts would only be possible once the impact on macroeconomic indicators is seen in the monthly releases, dealers said.

 

"The tariffs are expected to be inflationary for the US and disinflationary for the rest of the world, as well as hurting growth," a fixed-income investment head at a mutual fund said. "So they are bond positive for India, but that pricing will only play out gradually and once consensus growth and inflation numbers are revised down."

 

Additionally, most benchmark bond yields were at three-year lows already after tumbling on Wednesday, with the 10-year gilt yield falling 10 basis points. Dealers also shed their holdings of the 10-year benchmark 6.79%, 2034 gilt ahead of INR 300 billion of its fresh supply on Friday. The 10-year gilt yield ended 2 bps higher at 6.50% on Thursday.  End

 

Edited by Saji George Titus

 

 

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