Synopsis: With Trump's reciprocal tariffs set to be announced on April 2, stock markets are on edge. Analysts warn that harsh tariffs on India could trigger another market correction, adding to recent economic and corporate earnings concerns.
The global financial markets are bracing for fresh volatility as former US President Donald Trump's 'Liberation Day' tariffs are set to be unveiled on April 2, 2025. With uncertainty surrounding the nature and scope of these tariffs, market analysts fear another wave of correction in Indian equities.
On Friday, ahead of the anticipated announcement, the US benchmark indices took a hit. The Dow Jones Industrial Average plunged 715.80 points (1.69%), closing at 41,583.90, while the S&P 500 dropped 112.37 points (1.97%) to settle at 5,580.94. This selloff reflects growing concerns over the potential impact of Trump's trade policies.
According to a strategy note from JM Financial, "A key near-term worry is Trump’s likely announcements on April 2, which, if too harsh on India, can cause another round of correction in the Indian market."
What Are Reciprocal Tariffs?
Nomura highlighted that reciprocal tariffs could have varied interpretations. A simple model suggests the US would match its tariff rates to those imposed by trading partners. For example, if India’s import duty on US goods is 9.5% while the US currently charges only 3% on Indian imports, the new reciprocal tariff could rise to 6.5%.
However, analysts warn that the actual tariff policy might be far more complex. The US Trade Representative, Commerce Secretary, and Treasury Department are considering a broad range of trade factors, including:
- US trade deficits
- De minimis exports
- VAT rates and digital taxes
- Circumvention of US tariffs via third countries
- Currency manipulation and state subsidies
Nomura noted that some tariffs may also be driven by geopolitical motives, citing Venezuela as a precedent.
Impact on FPIs and Indian Stocks
Foreign Portfolio Investors (FPIs) have been net sellers in Indian markets for the past few months, with outflows of Rs 78,027 crore in January and Rs 34,574 crore in February. However, FPI selling slowed to Rs 3,973 crore in March, thanks to late-month buying activity. The trajectory of FPI flows will now largely depend on the severity of the upcoming US tariffs.
VK Vijayakumar, Chief Investment Strategist at Geojit Investments, stated, "If the tariffs are not severe, the rally may continue. But if they are harsh, we might see renewed selling pressure."
Auto Tariffs and Sectoral Risks
The auto industry is also in the crosshairs, with the US imposing a 25% import duty on all foreign-made cars and auto components, effective April 2. Companies with significant exposure to the US include Tata Motors, Bharat Forge, and Samvardhana Motherson (SAMIL). While SAMIL has manufacturing facilities in Alabama, potentially reducing its exposure, Tata Motors' JLR division—where 31% of retail sales come from the US—could see an impact.
Market Valuations and Outlook
Since September 2024, the Nifty index has corrected 11% from its peak, bringing valuations down from 23x to 18.6x one-year forward earnings, close to the 25-year mean of 17.2x. JM Financial suggests that while valuations have cooled, further downside may be limited unless new risk factors emerge.
With April 2 fast approaching, investors are left navigating uncertainty in an already volatile market. As Nomura put it, "Good luck navigating the fog of tariffs."
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investors should conduct their own research or consult a professional before making investment decisions.
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