Indian stocks struggles to shake off pessimism ahead of tariffs – News Air Insight

Indian equities are likely to extend a rare underperformance to their emerging-market peers as trade tensions with the US show few signs of abating.

Come Wednesday, President Donald Trump’s additional 25% tariff on Indian imports — as a punishment for buying Russian oil — is set to take effect. That brings cumulative levies to 50%, higher than export rival China.

The overhang from tariff risks, along with a slowdown in economic growth and downgrades in corporate earnings, has already led to foreign outflows from India’s $5.3 trillion market. The MSCI India Index is lagging the MSCI Emerging Markets gauge for a fourth straight month, and has trailed the broader measure by more than 15 percentage points year-to-date. That’s on track to be the worst relative performance by India in more than two decades.

“This trade war with the US is critical, so until it is resolved, I don’t expect a catchup,” said Rajeev De Mello, a portfolio manager at Gama Asset Management SA. Recent comments on war profiteering by US officials are also “worrying signs,” De Mello said, referring to US criticism of New Delhi’s continued purchases of Russian crude oil.

A tariff rate of 50% could shave 0.6 to 0.8 percentage points off India’s annual growth, according to Citigroup Inc. estimates. That may further dent prospects for companies after they delivered weaker earnings in the latest quarter. While Prime Minister Narendra Modi’s recent consumption tax cuts are expected to boost the economy, analysts expect earnings to remain under pressure for banks and information technology firms.There’s also growing concern that the government’s tax plan will widen its deficit. That has sparked a selloff in local debt and sent the benchmark yield up by 22 basis points this month, with investors expecting the trend to continue.

If the 50% tariff rate persists, the impact would be as much as 1% of gross domestic product for the full year, which would have larger implications for monetary policy and bond yields, said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership Ltd.

To be sure, economic growth may still be supported by the central bank’s easing cycle. The Reserve Bank of India Governor has said the impact of tariffs on India could be minimal, while hope remains for a favorable outcome in trade talks between New Delhi and Washington.

Still, headwinds for India’s market persist. Foreigners are set to extend their selling of local equities on a net basis into a second month in August. Meanwhile, rival Chinese stocks are regaining favor with investors.

A confluence of factors, including China’s artificial intelligence-led rally, a swathe of equity issuances, and geopolitical tensions with US have led to India’s underperformance in the near term, said Varun Laijawalla, a London-based fund manager at Ninety One UK Ltd.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)