07/04/2025
United States has announced a significant escalation in trade protectionism, imposing a baseline tariff of 10% across all imports, with country-specific reciprocal tariffs ranging between 10-50%. India faces a particularly sharp increase, with tariffs raised to 26%, marking a substantial escalation in trade barriers for Indian exports to the US. These tariffs will take effect in two stages: a baseline tariff from April 5th, while reciprocal tariffs may be implemented from April 9th, subject to further negotiations.
Certain sectors such as gold, critical minerals, semiconductors, and pharmaceuticals have been exempted from reciprocal tariffs. Additionally, automobiles and auto parts that were already subject to a 25% tariff remain unaffected by further reciprocal duties.
𝗦𝗵𝗼𝗿𝘁-𝘁𝗼-𝗠𝗲𝗱𝗶𝘂𝗺-𝗧𝗲𝗿𝗺 𝗘𝗰𝗼𝗻𝗼𝗺𝗶𝗰 𝗢𝘂𝘁𝗹𝗼𝗼𝗸:
Tariff-induced economic disruptions typically unfold in two phases: an initial inflationary shock, followed by a growth slowdown. While inflationary pressures from higher import costs may push bond yields up in the short term, the broader impact on demand and global growth is likely to dominate over time. The reaction in US Treasury yields, which declined post-announcement, suggests that markets are increasingly pricing in recessionary risks rather than inflationary concerns. This presents a dilemma for the Federal Reserve, complicating its policy stance.
For India, the direct impact of the tariff increase is substantial, as the US remains a crucial trading partner, accounting for $80 billion in exports (18% of total Indian exports and approximately 2% of GDP). Major export categories to the US include:
• Machinery ($8 billion)
• Electronics ($10 billion)
• Textiles and garments ($10 billion)
• Gems and jewelry ($10 billion)
• Agriculture ($5 billion)
• Pharmaceuticals ($9 billion)
While it is unclear whether all these categories will face the full extent of tariff increases, the broader concern is the indirect impact via a slowdown in global trade. Given that India’s nominal GDP growth is closely tied to global trade cycles, any disruption in demand from the US and its trading partners could weigh on India’s growth trajectory.
𝗙𝗮𝗰𝘁𝗼𝗿𝘀 𝘁𝗼 𝗠𝗼𝗻𝗶𝘁𝗼𝗿:
• Global Trade Retaliation: How other economies respond—whether through negotiation or counter- tariffs will influence the broader economic landscape.
• US Federal Reserve’s Reaction: Whether the Fed prioritizes inflation control or growth stabilization will shape market sentiment and liquidity conditions.
• Financial Stability Risks: High-yield bond spreads and emerging market currencies (EM FX) should be monitored for signs of stress.
• Market Implications Valuation and Earnings at Risk.
𝗖𝗼𝗿𝗽𝗼𝗿𝗮𝘁𝗲 𝗘𝗮𝗿𝗻𝗶𝗻𝗴𝘀 𝗢𝘂𝘁𝗹𝗼𝗼𝗸:
Although the direct tariff impact on India’s corporate earnings is limited, the indirect consequences are more significant. A weaker global growth environment will likely pressure Indian exports, affecting revenue growth for many sectors. Notably, two-thirds of India’s corporate topline is linked to global growth, either directly via trade or indirectly through commodity price transmission. Historical data indicates a strong correlation between BSE 500 revenues and export performance. With margin expansion levers largely exhausted, the risk of earnings downgrades is high.
𝗩𝗮𝗹𝘂𝗮𝘁𝗶𝗼𝗻𝘀: 𝗦𝘁𝗶𝗹𝗹 𝗘𝗹𝗲𝘃𝗮𝘁𝗲𝗱 𝗥𝗲𝗹𝗮𝘁𝗶𝘃𝗲 𝘁𝗼 𝗙𝘂𝗻𝗱𝗮𝗺𝗲𝗻𝘁𝗮𝗹𝘀
Despite some moderation, equity valuations remain stretched. While market multiples have reverted to their 10-year average, earnings levels are below historical norms, and bond yields—both in India and the US—are near decade highs. A key valuation metric, the earnings yield minus bond yield spread, suggests that downside risks persist, making equity markets vulnerable to further corrections.