As April 2, 2025, approaches, market watchers are bracing for potential tariffs from the Trump administration, which could significantly impact India. Analysts attribute the recent stock market correction to a combination of weak domestic economic data, disappointing corporate earnings, and foreign institutional investors (FIIs) shifting their focus to more attractive valuations in China and the US. Now, with the looming tariff concerns, fears of another selloff are rising.
Tariff Uncertainty and Market Jitters
According to JM Financial, a major short-term concern is the expected tariff announcement on April 2. If the measures are particularly harsh on India, another market correction could follow.
Ahead of these developments, the US stock market took a hit. The Dow Jones Industrial Average plunged 715.80 points (1.69%) to close at 41,583.90, while the S&P 500 fell 112.37 points (1.97%) to 5,580.94 on Friday.
Nomura highlights that the impact of these reciprocal tariffs varies based on interpretation. A straightforward approach would suggest matching other nations’ existing tariffs on US imports. For instance, if India’s tariff on US imports stands at 9.5% and the US currently imposes only 3% on Indian imports, a reciprocal adjustment would set it at 6.5%. Under this model, India, Thailand, and Brazil rank among the most vulnerable economies.
However, Nomura suspects that the scope of these tariffs will extend far beyond simple reciprocity. Ongoing investigations by US agencies, including the United States Trade Representative and the Treasury Department, cover a broad range of factors—trade deficits, VAT rates, digital taxes, tariff circumvention, currency manipulation, state subsidies, and other non-tariff barriers. There is also the possibility of tariffs being imposed for geopolitical reasons, similar to US actions against Venezuela.
FPI Trends and Market Impact
VK Vijayakumar, Chief Investment Strategist at Geojit Investments, believes that foreign portfolio investment (FPI) flows will largely depend on the severity of the reciprocal tariffs. If the tariffs are mild, the market rally could continue.
While FPI outflows from India amounted to ₹78,027 crore in January and ₹34,574 crore in February, March saw a significant reduction, with net outflows at ₹3,973 crore—thanks to renewed FPI buying in the latter half of the month. However, the uncertainty surrounding the April 2 announcement leaves investors treading cautiously.
Auto Industry Under Pressure
The US has confirmed a 25% import duty on all foreign-manufactured cars and auto components, set to take effect on April 2. According to CLSA, Indian firms such as Tata Motors, Bharat Forge, Samvardhana Motherson (SAMIL), and Sona BLW, which have significant export exposure to the US, could be impacted.
SAMIL, however, is expected to fare better due to its manufacturing presence in the US, particularly its Alabama facility, which could continue catering to domestic automakers with minimal disruption. Tata Motors, on the other hand, faces greater risk, as Jaguar Land Rover (JLR) derives 31% of its retail sales from the US. Since JLR models are primarily manufactured in the UK, they will be subject to the new tariffs. Historically, the US has been a lower-margin market for JLR, making these additional costs even more concerning.
Stock Market Valuations: Limited Downside?
JM Financial notes that since September 2024, the Nifty index has declined by 11% from its peak, bringing valuations down from 23 times earnings to 18.6 times forward earnings—closer to the 25-year mean of 17.2 times.
With valuations now near historical averages, JM Financial suggests that the market’s mean reversion process is largely complete, leaving little room for further downside. Additionally, Bank Nifty valuations currently appear highly attractive, offering potential opportunities for investors.
Conclusion: A Volatile Road Ahead
With uncertainty clouding the extent and impact of the upcoming tariffs, investors are navigating a complex landscape. While recent corrections have brought market valuations to more reasonable levels, the fate of Indian stocks will largely hinge on Trump’s decisions on April 2. As Nomura aptly puts it, “Good luck navigating the fog of tariffs.”
